Bull Trap Trading Strategy - How to make a profit from trapped Traders
Bull Trap Trading Strategy - How to make a profit from trapped Traders
Bull Trap is where the price breaks out above a previous resistance or peak, but doesn't have the strength to move on and quickly turn back down. Bull Trap caused a lot of Traders who entered the threshold break order to get trapped and exit in pain.
https://www.besttradingbook.com will share a trading strategy that takes advantage of a Bull Trap to make a profit, turning these traps into an opportunity to make money in the market. The article is divided into 2 parts.
The definition of Bear Trap - a discount trap is similar to Bull Trap, but vice versa, so I will not mention in this article because the application is the same.
What is a Bull Trap?
A Bull Trap is when the price moves above resistance, or a previous high, and CAN CLOSE ABOVE the previous resistance or high, but not strong enough to move up and back down. If you pay attention when the price closes above the previous high, or above resistance, but turns down, it is still called a bull trap, avoiding the concept of stop hunt.
Bull Trap example on EURUSD D1:
In the example above, you can see that the price closed completely above resistance but then fell back again, which is Bull Trap and its difficulty lies here. The price closed above the resistance means it ACCEPT for another increase, instead of REFUSING UP (rising up but closing below leaving a trailing candle), leaving many Traders trapped.
Bull Trap - How to avoid a Bull Trap?
Here are two ways you can use it to avoid getting a Bull Trap:
Never trade the breakout in parabola-shaped overbought trends
Only trade breakout when the market appears buildup price segments - accumulation, accumulation at a resistance area
Below I will explain:
1. Do not trade breakouts at parabola trends
Parabola-shaped trends are over-stretched trends, usually caused by Traders who have been jumped by FOMO to push prices too high above their true value, causing the trendline to look parabola. Parabola-shaped trends are often unsustainable, and when reversed, they have dire consequences:
On the BTCUSD chart, for example, the price is pushed up excessively, forming a parabola, and when it is unable to continue, the price tends to be "sucked" to the lowest area where the parabola curve begins.
Why not trade breakouts at parabola trends? Because the trend of this type reverses very quickly and when entering a Breakout style order, we do not know how far the price will go while the position is difficult to place a stop loss, causing the entry to take the risk: the reward is not good.
On the contrary, when an uptrend has higher highs and higher lows occur steadily and sustainably, the breakout strategy will work very well. The uptrends respect the underlying trendline, especially when the price moves within an upside channel, the breakouts are usually of higher quality, and less likely to happen.
2. Only trade breakout with buildup
To avoid Bull Trap, we should only trade breakout when the market appears cumulative pulling-about price zones at a resistance zone - called buildup:
GBPCHF D1 buildup example:
Why is it necessary to wait for a buildup to appear to trade breakout?
Good profit-loss rate: When trading breakouts at buildups, you have 1 reasonable point to place a stop loss - under the buildup and have a good rate of profit and loss because often post-build breakouts will push prices very far;
Signs of Strength: When price forms a struggle at resistance, it's a sign of strength. It shows that the buyers are willing to buy at higher prices (even at resistance);
Profit from selling traders: Traders who are selling at resistance will place a stop loss just above the resistance. The longer the price accumulates in this zone, the more traders place sell orders and the stop loss is above. When the price breaks up, these piles of stop losses (buy orders) will be triggered and push the price up sharply. Almost, we are taking money from these selling Traders.
Bull Trap - How to profit from trapped Traders
Last, we learned how to avoid a Bull Trap and the good times or signals to trade Breakout. Today we will take advantage of Bull Trap to a higher level - use it to make a profit.
How to do:
- Find a strong bull to approach a resistance zone, the stronger the better
- Wait for the price to break through the resistance, the market is now trapping a breakout Trader waiting for the price to break through to buy
- Enter an order when there is a bearish candlestick that closes below resistance
This sounds dangerous because we are fundamentally trading against the trend. However, this is a high probability setup, because we understand all psychological developments and anticipate what will happen if the pattern appears similarly. We have an advantage.
Here are a few examples of Setup Bull Trap on WTI D1:
Bull Trap - How to set stop loss
Putting stop loss depends on your taste. You can place a simple stop loss a few pips above the top of the false break candlestick ( resistance piercing candle ). Or you can set a stop loss equal to 1 ATR from the highest high.
The important thing here is that we are trading against the trend, so we should not place the stop loss too far, and when there are signs of price returning to the resistance zone, we should exit immediately. When retest for the second time, your chances of breaking through resistance is higher and your stop loss will be hit. This strategy requires a profit of 1-2 candles after entering the order, if it is too long but the price does not drop, you should exit. This is called the Time Stop concept, which is useful for trend reversal strategies, or breakout trading.
Bull Trap - How to exit commands
You can see that the Bull Trap strategy takes advantage of trapped traders to make a profit, and forces us to sell in the opposite direction with a bullish price segment with strong motivation. If you are right, the market will fall down very quickly, and you will see profits immediately. But if it is wrong, the market will return to retest the resistance zone and with enough momentum, it will break up and hit your stop loss. In the correct case, how to exit the order?
The characteristic of winning orders in the opposite direction is that the price goes down very quickly, without even having the chance to return at all. Our goal is to get as much profit as possible, so it is best to trailing stop.
For each lower bearish candlestick, we translate the stop loss to the top of that candle, and so on until the end of the downtrend. When a candle closes higher than the previous one, we exit the order.
Or you can trail stop in many different ways, as long as you see fit.
- Trailing stop by trend line: Close an order when the downtrend line is broken;
- Trailing stop with resistance support: Move the stop down gradually when the price breaks above the support levels below. Or it is possible to move the stop loss when a swing high/swing low is formed;
- Trailing stop by ATR or Keltner Channel: Add ATR to the chart, and place a stop loss about 2ATR from price, or maybe 3ATR. When the price moves up or down, move the stop loss to Follow, as long as there is a distance of 2 ATR or 3 ATR. A similar way is to use the Keltner channel (I have attached below), put in the parameters of the upper and lower bands 2 ATR, we have 2 lines on the bottom to trailing stop very easily with the correct value. 2 ATR. A similar way is to use the Keltner channel (I have attached below), put in the parameters of the upper and lower bands 2 ATR, we have 2 lines on the bottom to trailing stop very easily with the correct value. 2 ATR;
- Trailing stop by Donchian Channel: Exits order when the price penetrates the band;
- Trailing stop with Heiken Ashi candlestick: Exit when Heiken Ashi changes color.
Read more at: https://www.besttradingbook.com/
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Good Trading,
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