What is the Bull Trap Pattern?
The Bull Trap pattern is a price movement that breaks a determined Resistance level then shortly after reverses breaking the same level downwards.
As the name suggests, this price movement is a trap because it lures traders to believe that because the Resistance level has been broken upwards, then the trend will continue upward. It is called a Bull trap because it is a pattern that occurs on an uptrend and traps buyers in unexpected circumstances.
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As a trader, you must have experienced scenarios where the price was bound to keep rising as far as you are concerned, but it didn’t turn out that way.
It might have risen at first and then you were satisfied, then the shock of your life followed as the price reversed several candlesticks later. It went so low to the extent of even activating your stop-loss order – that is if you had one in place and if not, your account must have suffered losses.
Then that scenario is exactly what we are talking about, where the price movement tricks you that it will keep rising but it does the opposite after you entered.
The focus of this article is on How to identify a Bull Trap, How to avoid being trapped by the Bull Trap, and even How to trade the Bull Trap pattern. It is all these three factors summed which will bring you to a point of doubling your account trading the Bull Trap pattern on Olymp Trade.
How to Identify a Bull Trap pattern on Olymp Trade Charts.
What do you look for to predict that a Bull Trap pattern is likely to result? That is the question we need to answer in this section and then we will be good.
Spot the following prerequisites to the formation of the Bull Trap pattern;
A strong uptrend which has been in play for a long time
The first thing that will point to the formation of a Bull Trap pattern is a long bullish trend.
This is so because buyers are most likely to have exhausted their resources and are therefore likely to begin taking profits somewhere around the resistance level ahead of the long uptrend. This resistance level may have been tested several times without being broken which takes us to the next point.
2. Many instances of testing the Resistance level
This means that the resistance ahead of the long uptrend has had several attempts to be broken by the price upwards but without success.
Every time the price tries to break the resistance level upwards, it falls back and reverses. This is most likely to trick buyers that if at any time from then the price breaks the resistance, then an uptrend will result – don’t fall for it.
3. Formation of a range-like pattern on the resistance level
A range like behavior of the price between the resistance level and a lower close support level which might be determined or not occurs.
The price seems to reverse on the resistance level and falls, to later reverse upwards after reaching a certain lower level. This ranging behavior may not establish a specific level in which the price doesn’t tend to break but they may oscillate between the resistance level and some lower level.
4. The appearance of longer bullish candlesticks
These are usually spotted close to the final phase of the Bull Trap. Once you spot these coupled with the other confirmations discussed above, then you would rather not go long.
In identifying the Bull Trap, after spotting the events before the pattern’s formation, it is also essential to know what a Bull Trap pattern looks like. It is only then that you can say that you have fully identified a Bull Trap pattern.
Now, the Bull Trap pattern comes in classical types or examples such as the Bearish engulfing, the Rejected Double-top, and a Failed retest of the resistance level.
After the prerequisites have been met, you then need to observe for these formations which will confirm that this is a Bull Trap.
The fact that they may not form after the preceding events we talked about, however, does not rule out the imminent Bull Trap pattern. These only come to confirm but even if they don’t, do not buy.
Let us discuss the Bull Trap pattern classical formations down here;
What do you take it for, when a bullish shortened candlestick is followed by a longer bearish candlestick after a considerably long uptrend? That may mean that Buyers are losing the fight as Sellers take an upper hand. Does that not warn you against entering that Buy position? Of course, it does.
2. Rejected Double-top
You are well familiar with the double top pattern.
Here the second top has candlesticks that show very long upper shadows or wicks. This is a sign of rejection where the Buyers tried pushing the price higher but the sellers overpowered them by pushing it lower hence the long upper wicks. If you spot this, coupled with the other preceding factors we discussed above, then Buying is discouraged.
Let us assume that the price broke the resistance level upwards. You waited for it to test the resistance and the level was broken again downwards instead of being confirmed as a real resistance. Still wanna Buy?
How to avoid being trapped by the Bull Trap pattern on Olymp Trade.
We have seen that the Bull Trap pattern can dupe traders into buying yet reverse later. We have seen ways in which we can identify the Bull Trap and now want to see how to avoid being victims of the same.
Observe the following to avoid the hidden intentions of the Bull Trap.
- Shorter bullish Candlesticks begin to form as the price reaches the resistance level followed by a longer bullish candlestick. This means that the Sellers have more say and you would rather not Buy.
- Long upper wicks of candlesticks on the resistance level show that bears are pushing the prices lower despite the bulls’ attempts to take them higher. You would rather not buy it.
- Avoid buying at the resistance level but wait for the resistance to be retested and proven real. If the retest fails and the same level is broken downwards, don’t take a Buy trade. The ideal conditions suggest selling at resistance levels.
- Avoid late entries into trades but enter as the trends begin. We have seen that the Bull Trap occurs mostly after long uptrends. If you had traded earlier, you would be struggling to catch trends during their final stages towards their end.
How to Trade the Bull Trap pattern on Olymp Trade.
Can you profit from this pattern which we spotted only to avoid?
Yes, you can. You can take every Buy we advised against as a Sell signal which may be profitable. However, let us deal will more specific and clearer ways you can profit from the Bull Trap pattern.
In addition to the avoided buy trades being converted into sell trades, you can profit from the Bull Trap pattern by taking these two specific actions
- Enter a Sell position once the trend reverses– once you have established that a Bull Trap pattern has already occurred and the price trend has reversed into a complete downtrend, then you can flow with the newly forming downtrend and profit from it. We said that catching trends early is the best.
- Buy the Resistance successful re-tests only– Until your resistance has been re-tested successfully by several price falls without breaking the level downwards, do not buy. But if it is confirmed real, that is the time you should consider a Buy position.
These two and the many more actions tied to avoiding the buy positions as well as avoiding risky and tricky trades will double your account.
Final thoughts on the Bull Trap pattern.
You now understand the events before a Bull Trap pattern formation. Besides, you now know how to identify one and better still, how to profit from the Bull Trap Patterns. You, therefore, do not need to fear being trapped anymore, because you understand the trap fully.
Identify such traps on your Olymp Trade charts today and trade them like the pro that you are!! Double that account by trading what is not commonly traded.