What is the Bull Trap?

No Forex trader has never heard about the bull trap.

You must have read that a breakout is confirmed when the price closes above the resistance. 

So, you bought the breakout thinking that the price will move higher. 

After buying the currency pair, the price moved in your favor a little. 

However, the market made a 180-degree reversal and you were stopped out!

That is what we call a bull trap!

It occurs when buyers are “trapped” as their trade goes against them. 

See the chart given below…

In the above chart, the black line running horizontally is the Resistance. 

The chart shows the price action breaking through the resistance and closing slightly above it. 

Most traders enter long positions immediately the price breaks through the resistance in a bullish direction. 

They believe that the price will maintain that bullish trend for some time. 

So, this must have happened in the above chart!

Unexpectedly, the price action made a sudden reversal in a bearish direction. 

Traders who placed their trades immediately the price action broke through the resistance were then trapped in a bull trap. 

The reason is that the trade is now going against them. 

So, how can you avoid being caught up in a bull trap?

If you’ve ever asked yourself that question, I will give you the answer…

How to Identify the Bull Trap

Knowing how to identify a bull trap will be of great importance to you as a trader. 

The greatest benefit is that you won’t be caught up in one!

So, knowing how to identify this chart pattern is key for traders to trade successfully. 

It’s easy for any trader to identify a bull trap if they know what to look for. 

The following are some of the common signs that a bull trap is about to occur…

#1: Multiple Testing of the Resistance 

The first sign that a bull trap is about to occur is a strong bullish trend that has been sustained for long, reacting significantly to a particular resistance zone. 

A strong bullish trend with minimal bearish interference is an indication that buyers have taken control of the market. 

However, after pushing the price to a particular resistance level, they begin to respect or fear it, and the price pulls back before going even higher. 

Consider the chart given below…

The above chart shows that the bulls had taken control of the market for a long time. 

This is clearly shown by the strong bullish trend shown with a red arrow moving upwards. 

The price then hit the resistance level. 

This is the black line running horizontally on the chart. 

Testing of the resistance then begun. 

The price action is trying to maintain the bullish trend, but sellers have joined the market and are now trying to push the price lower. 

The sellers overcame the buyers, and the price action reversed in a bearish direction. 

The sellers are now controlling the market. 

The chart clearly shows that the resistance level was tested for at least 4 times before the price action started the strong bearish move. 

This means that the initial bullish trend was very strong. 

A trader who had entered the trade will find himself in a bull trap. 

Hence, one of the ways to identify a potential bull trap is when the price makes significant stops on a resistance level after a strong uptrend. 

#2: Unusually Big Bullish Candles

The final phase of a bull trap is normally characterized by a huge bullish candle that dominates most of the immediate candles to the left. 

There could be multiple explanations behind this candle…

-First, buyers could be believing that a breakout has occurred and they are now buying. 

-Secondly, some big players could be pushing the price higher intentionally to lure unsuspecting buyers, or, 

-Thirdly, the sellers could have cunningly allowed the buyers to take over the market momentarily so that sell limit orders located above the resistance zone may be activated. 

Consider the chart given below…

The above chart also shows the formation of a bull trap chart pattern. 

The black line running horizontally if the Resistance. 

A huge candle formed before the trapping occurred. 

This is the candle pointed by a black arrow on the chart. 

The candle is huge compared to the immediate candles on its left. 

Although the price has managed to break through the resistance, it begins to reverse immediately after this huge candle. 

So, the candle was a signal that a bull trap is about to occur. 

#3: Range Formation

A bull trap setup normally forms a Range-like pattern on the resistance level. 

A Range is where the price tends to bounce back and forth within the support or resistance level. 

However, this type of Range may not be perfect, mostly on the upper side.

The reason is that the market may be making smaller higher highs. 

Consider the chart given below…

The above chart shows how a Range is formed prior to the occurrence of a bull trap. 

The Range is shown by the two black lines running horizontally. 

The Range is not perfect on the upper side. 

The reason is that not all highs managed to touch or reach the resistance zone. 

A bull trap occurred immediately after the Range. 

This means that a Range can act as a signal that a bull trap is about to occur. 

How to Avoid the Bull Trap

So, how can you avoid being caught up in a bull trap?

Let me give you the tips…

The first tip is…

#1: Avoid “chasing” Parabolic Breakouts

You’ve just seen a breakout. 

The candles are so bullish. 

You are thinking…

“How can the market reverse?”

So, you chase the breakout. 

That marks the beginning of trouble!

The reason is that when the price has exploded higher, there is no floor like Support or swing low to hold the higher prices. 

So, it’s very easy for the price to reverse in a bearish direction, looking for the nearest floor. 

Note that the price will only make a pullback once it finds a floor. 

If the floor is located far, the price will make a significant drop. 

Consider the chart given below…

The above chart shows a parabolic move followed by a downward trend. 

The black horizontal line once acted as a resistance when the price was trying to increase. 

The price finally managed to break through the resistance. 

After a significant increase in the pair price, which is the parabolic move, a significant price decrease followed. 

While dropping, the price action was looking for support or a floor. 

It only found this at an area where it once experienced resistance. 

During the parabolic move, the price increased sharply without or with very little resistance. 

That’s why it didn’t create floors for support.  

When chasing a parabolic breakout, you don’t have a logical place to place a stop loss order, so you’re most likely to be stopped out, even on a pullback. 

So, to avoid being caught in bull traps, stop chasing parabolic breakouts!

#2: Trade Breakouts with a Build-Up

Yes, a breakout can land you in a bull trap. 

However, don’t get scared of trading breakouts. 

But, trade breakouts with a build-up. 

So, what is it? 

A build-up is a tight consolidation that you see on charts. 

The tighter the build-up, the better. 

This means that you should look for build-ups where the candles have no space to move. 

Consider the following chart…

The above chart shows how a build-up is formed on a chart. 

The build-up is formed just before the breakout. 

But why should you wait for the build-up?

There are couple of reasons. 

First, you will get a favorable risk:reward ratio. 

You get a logical place to add your stop loss order, that is, just below the low of the build-up. 

This means that in case the price drops, you won’t stay in that trade beyond the low of the build-up. 

This will give you a more favorable risk:reward ratio. 

Secondly, the build-up is a sign of strength. 

The build-up means that the buyers are willing to buy the currency pair even at higher prices. 

Even if the price increases, the buyers will keep on buying, pushing the price higher. 

Thirdly, you can profit from losing traders. 

When most traders spot the price action at the resistance level, they will go short and place their stop loss orders just above the resistance. 

If the price action hovers around the resistance for long, many traders will go short and the number of stop loss orders placed above the resistance will increase.  

But what will happen if the price breaks above the resistance?

The cluster of stop loss orders placed above the resistance will be triggered, fueling more buying pressure. 

This will then increase the odds of a successful breakout. 

So, always trade breakouts with a build-up. 

#3: Avoid Late Entries

As we stated earlier, a long sustained uptrend should send a signal of a cunning uptrend. 

This means that an uptrend that travels for long is more likely to form a bull trap. 

So, you can avoid bull traps by steering clear of late entries. 

If the trend has been running for a period that can be said to be “too long”, don’t trade it. 

It has high chances of reversing, creating a bull trap. 

Careful buyers and sellers understand that careless traders will join the market then add trades during the pullbacks. 

They can wait and lure them by reversing the trends when it is least expected. 

How to Trade the Bull Trap

You now know how to identify a bull trap and avoid being caught on the wrong side of the market. 

It’s possible to trade a bull trap and benefit from the trapped traders. 

• Look for a strong power move coming into Resistance. The stronger the move, the better. 
• Let the price break above Resistance. Breakout traders will get trapped. 
• Look for a strong bearish close below the Resistance. This should act as an entry trigger.

Consider the following chart…

The above chart shows how you can time your entry point using the bull trap. 

The black line running horizontally is the Resistance. 

First, there is a strong power move into resistance.

This tells us that there is a strong bullish trend. 

The price then broke through the resistance. Many traders must have bought the currency pair, thinking that the bullish trend will continue. 

Suddenly, the price changed in a bearish direction. 

All the traders who had bought the currency pair were caught up in a bull trap. 

There is also a strong bearish close below the resistance.

You should use this as the entry point for your trade. 

This has been shown in the chart using a blue horizontal line. 

Also, you can benefit from trapped traders hoping to score a huge bullish reversal in an existing downtrend. 

It works as follows…

–Look for a deep retracement to the previous support, that is, in a downtrend. 

-Wait for the price to break below the Support turned Resistance. The bullish reversal traders will be trapped. 

-Look for a bearish close below the Support turned Resistance. This should be your entry trigger. 

Consider the chart given below…

In the above chart, there is a retracement back to the previous support. 

The price action managed to cut through the support in a bearish direction. 

In this case, the black horizontal line is acting as a Support. 

After some time, the price action broke through the Support in a bullish direction. 

In this case, the previous Support line has turned into a Resistance. 

The bullish trend didn’t last for long, but reversed in a bearish direction shortly after breaking through the resistance. 

You can then look for a trading opportunity just below the Support turned Resistance. 

How to Set your Stop Loss when Trading the Bull Trap

When trading a bull trap, the best place to place your stop loss order is 1 ATR above the Resistance. 

Your trade will have room to breathe and you will not be stopped out in case of a sudden spike in the pair price. 

Consider the following chart…

The above chart shows the position at which you should position your stop loss order when trading a bull trap. 

The black line running horizontally is the Resistance. 

The position of the stop loss is shown with a red horizontal line marked as Stop Loss. 

This position is just 1 ATR above the resistance. 

This will prevent you from being stopped out if a sudden increase in the price occurs. 

How to Exit your Winners

You must have realized that the bull trap pattern requires traders to go short against a strong momentum. 

If the market reverses lower quickly, you will earn a profit. 

However, if the market moves higher quickly, you will be stopped out. 

So, how should you exit your winners?

Just trail your stop loss on the previous candle high. 

This way, if the price keeps on moving lower, you will ride the move. 

But in case the price closes above the previous candle high, you will exit the trade. 

Consider the chart given below…

The chart shows how to trail the stop loss when trading the bull trap chart pattern. 

The trailing of the stop loss should be done until the exit point is reached. 

The stop loss has been trailed as long as the price action kept on moving lower. 

The stop loss order was shifted 3 times before reaching the exit point. 

The positions of these three stop loss levels have been shown using red horizontal lines marked as SL 1, SL 2 and SL 3. 

The exit point is the position where the price closed above the previous candle high. 

This has been shown clearly on the chart with a red horizontal line marked as Exit. 

With this approach, you will keep on riding the trend as long as it is moving lower. 

Conclusion:

So, this is what you’ve learned…

• A bull trap happens when you trade a bullish breakout but the price reverses lower. 
• Bull trap patterns lure traders to get into trades that end up into losses. 
• That’s why you must understand how a bull trap is formed and how to trade it. 
• If you understand how to trade a bull trap, it can become a profitable setup to you. 
• A Range can act as a signal that a bull trap is about to occur. 
• Multiple testing of the Resistance level can also act as a signal that a bull trap is about to occur. 
• Parabolic breakouts are more likely to reverse their direction. 
• The reason is that they don’t create floors for support. Avoid chasing them.