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The main reason that investors have stocks is that they buy (entry points) at the wrong point and do not dare to cut losses. In addition to the lack of careful consideration and analysis. This can happen as investors or traders fall into bear and bull traps. (Bear Trap and Bull Trap)
What is a Bear and Cow Trap? and how to identify Check out the following comments:
Meaning of Bear Trap
A bear trap or bear trap is a sharp, relatively long falling price in the middle of an uptrend. This phenomenon can happen at any time and with any asset, from stocks, forex or crypto, rather than selling assets. Bear trap is the right condition for you. buy when weak.
This decline can occur due to the fact that the price has broken through a limited support. Many traders cut their losses and sell their assets. As a result, sell too high and the price goes down This condition is often exacerbated by the entry of short sellers.
Short sellers who profit from falling asset prices borrow assets from brokers and sell them to the market before the price increases. As a result, the selling pressure is getting stronger and the prices of these assets will definitely drop.
However, at one point, selling pressure was not as intense as new buying pressure. So the price rose again. In cases such as Gamestop shares, this high buying pressure is caused by encouraging traders and investors to “pull” short sellers by raising prices. The phenomenon of repelling short sellers by raising prices is known as compression.
to understand more Let’s look at the following example:
From the figure above, it can be seen that the prices of these assets generally go up. For traders who are not aware of this trap The area in the circle will definitely be the location of the cut loss. So he sold his assets. As a result, he failed to get the most profitable opportunity.
Meaning of bull trap
The opposite of a bear trap is a bull trap or a bull trap. A bull trap is a condition that appears to be a reversal of the price from a downtrend to an uptrend (uptrend) even if the asset price goes up or remains in a downtrend (downtrend).
Unwary traders will use this opportunity to buy assets. resulting in a losing trader If this loss occurs over a long period of time in the stock market, it results in another condition known as accrual.
to understand more Lets look at the following picture:
From the picture above, it can be seen that the asset’s price is in an uptrend and breaks the resistance with a real breakout. but apparently instead of the continuous rising price Asset prices have actually dropped. This may happen as the initial high buying pressure decreases. Therefore, selling pressure has taken over the asset market. Like a bear trap Bull traps can occur in any asset trade and in any time frame.
How to avoid bear traps and bull traps
1. Understand the concept of reversal and breakout.
In the first picture, the type of breakout that occurs is a false breakout. Therefore, it is normal for the price trend to experience a reversal. However, in the second picture, the breakout is a real breakout. Whereas the current trend should continue and not reverse.
Even if the concept is correct But the above two examples show that breakouts also have the potential to generate false signals. Therefore, it must be accompanied by other reversal patterns.
to analyze the price movement reversal pattern This can be changed. From reversals that appear in the form of candlesticks and reversal patterns that arise from a combination of price patterns such as wedges or triangles. These patterns, in addition to being able to show the correct price direction. can also cause false signals Either because you analyze when the candle is not yet fully formed or is not confirmed. or for other reasons Therefore, it is important for traders to combine price action analysis with breakout.
2. Avoid parabolic formation.
According to the famous trader Rayner Teo One type of breakout that can indicate a potential reversal is breakout In short, a parabolic breakout is a breakout that occurs after the appearance of multiple long candlesticks. Whether the candlestick is up or down, according to him, this type of breakout tends to revert more easily.
On the other hand, a good breakout is a breakout that consists of many small candlesticks that go up and down according to market conditions. Although difficult to form But this type of breakout is also more difficult.
3. Analysis using technical indicators
Traders need to use various oscillator technical indicators such as RSI, ADX or Bollinger Bands to help determine. These indicators are structured with various mathematical formulas. to be able to identify indications of overbought or oversold The presence of these two conditions causes the asset price movement to reverse.
By using this indicator in combination with breakouts and price action. Traders will know if the current price action has the potential to reverse or not before the reversal process takes place.
4. Follow the news
Short-term traders may not be too affected by the underlying conditions, however, regardless of the time frame, traders It remains to stay up-to-date on investment and economic news to avoid getting caught in a bear trap or a bull trap.
This news is useful for answering questions. “Why is the price of an asset suddenly going up/down?” and “Will this rise/fall last for a long time or for a short period of time?” with good ability to answer these two questions. Traders can avoid bull traps or bear traps and make the right trading decisions. trailing stop lossMarket orders and automated trading as a precaution if the price moves beyond expectations.
Trailing Stop Loss is a stop loss mechanism designed to adjust the price increase, i.e. if the price of an asset increases, the TLS value will also increase. But if the asset’s price goes down, the TLS value corresponds to the pre-defined level TLS, the market order. And automated trading allows traders to execute their trading strategies with precision, speed and accuracy to avoid further losses.
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