If you have been trading forex long enough, you most likely have been a victim of bear trap in forex trading.
Well, in this post I will share with you some of the tips I use myself to minimize being caught out in a bear trap in the forex market and I hope these tips and tricks that I have learnt can help you in your forex trading career.
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So what actually is a bear trap and are there any ways to avoid being a victim of bear trap or not?
- I will explain what a bear trap is
- I will also tell you where on your chart bear traps are most likely to happen
- And I will also give you 5 trading techniques where you can use to avoid a bear trap.
Let’s get started.
What Is A Bear Trap In Forex Trading? Definition
This is the definition of a bear trap in trading: a bear traps is a situation where sellers think that a support levels is going to break and so as soon as price starts to break that support level, they start selling on that breakout.
And sure enough, price will move down as if it is truly going to go down but right after the breakout it does something strange…
Guess what price does?
It changes direction quickly after the breakout and shoots up!
So the sellers with all their sell orders are now feeling the pain of price going against them as now their profits are now turning into a loss.
They were making money when price was going down…now all of a sudden, the price has changed and going back up and starting to wipe out their paper profits and soon, their stop loss is about to be hit.
The bears (sellers) are trapped. The sellers are feeling the pain. They have been deceived. Next thing, their stop loss is hit and they are out of the trade-with a loss. The sellers are not happy.
That situation I just described is called the bear trap situation.
In short, a bear trap is FALSE SELL SIGNAL.
Here’s a real situation of a bear trap in EURUSD 4hr chart:
2 Main Characteristics Of A Bear Trap That I Look For
Other forex traders may have different techniques for figuring about a bear trap but for me, its these 2 and when I see them, I take trades in the opposite direction to the sellers (I buy):
- the breakout candlestick which I will call the “bear trap candlestick” must be really (solidly) bearish candlestick that breaks the support level and CLOSES BELOW the support level. But right after the formation of the bear trap candlestick, the next 1 or 2 candlestick must show a slowing down of bearish candlestick momentum which means shorter candlestick body lengths or formation of bullish reversal candlesticks on the 2nd and 3rd candlestick after the bear trap candlestick.
- the bear trap candlestick breaks the support level and goes down but then price rises up and CLOSES ABOVE the support level.
When I see any one of these two situations happen, I know that this is most likely a bear trap.
And a bear trap is a good buy signal for buyers.
Where Are Bear Traps Likely To Happen?
As you may have figured it out already from what I wrote previously above, bear traps trend to happen around major support levels.
So if you see price heading to a major support level, always have this at the back of your mind.
5 Trading Techniques To Avoid Bear Traps In Forex
#1: Place A Larger Stop Loss
Placing a larger stop loss will not stop the bear trap from happening, it will still form but because your stop loss is a big distance away, you are betting on the fact that after the bear trap, price will rise but then it will fall down again. But here are the problems:
- it may take a very long time before price can turn around and head down before you start finally making a profit.
- or price may not return at all which means you get stopped out eventually after waiting for a very long time
If you are willing to wait that long, then place a larger stop loss and wait.
#2: Follow The Larger Trend
If the breakout of the support level is not in the direction of the larger trend, you should be really careful as there’s potential for bear trap to happen because buyers will be getting in after the bear trap candlestick to push up price.
#3: Don’t Trade The Initial Breakout But Trade The Retracement
If you are a seller and want to sell on a breakout but really don’t want be be bear trapped, why not just let the breakout happen first and then after price moves down (which confirms that downtrend is still intact), wait for price retracement and then sell.
#4:Watch The 2 Candlesticks After The Breakout
If you are a seller and you sell on the breakout of the support level. But then, just after the breakout, if the next 2 candlesticks show:
- lack of downward momentum
- or are bullish reversal candlesticks
then its time to start taking some profits off or moving stop loss to break.
Such indications are bear traps signals that you should be aware and to be quite honest, when I see such, I start buying right there.
So if you are a buyer, this is a really important clue to know.
The risk:reward of such a trading setup is really good and if that is a bear trap, the next thing that happens is that price tends to move up quite fast and if you buy, you’d be laughing.
#5: How Far Has Price Traveled Before Reaching That Support Or Resistance Level?
One of my trading characteristics is that I don’t like to sell on breakouts of support levels or buy on breakouts of resistance levels-this form of trading does not resonate with me because of the fact that price has already moved a great deal towards the point of breakout so at the back of my mind I’m thinking that there may not be enough momentum to to carry past the breakout so that I can make a profit.
Having said that, there is an exception:
- I will trade the breakout of support level when I see that price has not moved a great deal before reaching that support level.
- when I see such a such a situation, I know that there is enough momentum left in price so that should a breakout happen, price has the potential to keep going down.
Ok, when I see price heading to a major support level, I tend to ask myself this question: has the price traveled a large distance already?
If the answer is yes, I tend to be a bit reluctant to take a sell trade on the breakout of that support level.
You Cannot Avoid Bear Traps In Trading 100%
The bad news is that with all the analysis and knowledge that you can have, everyone will get caught with bear traps. I have been caught many times.
This is one thing you have to learn to live with and deal with it as it happens.