Trading Bear Traps To Profit
What is a Bear Trap
A bear trap is a technical pattern that occurs when the price action of any trading instrument incorrectly signals a reversal from a downward trend to an upward trend this lures unsuspecting investors. A technical analyst might say that institutional traders try to create bear traps as a way of tempting retail investors to take long positions. If the institutional trader is successful, and the price moves higher briefly, it gives the institutional traders the ability to unload larger positions of stock that would otherwise push prices much lower.
There are 3 important candlestick Bear trap patterns:
- When a Bearish bear trap candlestick breaks and closes below a support level
- When a bearish bear trap candlestick break the support level and goes down then closes above the support level making the next few candles bullish candles.
- When a bullish bear trap candlestick breaks the support level and goes down but then it closes above the support line making a bullish candlestick
Why do Traps happen in the Forex markets
- Firstly its because of unseen events, be it speeches by political leaders or influential economic actors. It’s impossible to predict what politicians or financial leaders will say. If the market perceives their speeches as positive, the price will rise.
- Secondly when the buyers are dominating the market there is high risks of a bear trap.
- The third reason is a long downtrend, the market is constantly changing direction. If the downward movement stays for long, it’s unlikely to continue
Best strategy to trade a bear trap
- Step 1. If you managed to identify a bear trap, you should wait for the formation of a bullish candlestick.
- Step 2. If the candlestick forms, you can place a Buy Stop limit order. The entry level is several pips above the bullish candlestick’s high (1).
- Step 3. The Stop Loss level can be placed 3-5 pips below the bear trap candlestick’s low (2).
- Step 4. There are two ways to measure the take-profit level. First, you can use a well-known risk/reward ratio. If you measure the Stop Loss distance, you should multiply it by 3. Second, you can find the previous resistance level and place the take-profit there (3).