A bull trap trading strategy looks to take advantage of traders trapped in a losing position. Just like the name says, it looks to trap bulls into making a trade and then slams price against them forcing them to exit their position.
As the trapped bull traders exit, they sell their positions which helps to propel traders who are trading in anticipation of a bull trap, in the direction of their short trade.
The post, What is a bull trap in Forex? will show you how to avoid getting trapped in these trades.
If you don’t know the types of bull trap chart patterns to look for to use this bull trap trading system then read this post: 3 bull trap chart patterns every forex trader needs to know.
What Type Of Pattern Do We Use For Bull Traps?
I wrote a post on the patterns we are looking for to trade the bull trap trading strategy. Review that trading article but here is a quick visual on what we are looking for.
I want to say that this version of trading bull traps will differ slightly than the common trading approach. This approach has a higher success rate (not fully backed by stats) and is easier to confirm due to the first part of the setup.
What You Need For This Bull Trap Trading System
No indicator is required to trade this strategy although one could argue the use of a moving average will help. I will cover that addition later in this article.
Like most price action trading strategies, you don’t need much to trading them:
- Any currency pair can be used
- Forex traders may want to use higher time frames as patterns appear to be more relevant. I like daily charts.
- Learn what bearish reversal candlesticks look like
- You may wish to use multiple time frame trading techniques but I generally don’t.
- Possibly use a moving average to show extensions.
Bull Trap Forex Trading Strategy Trading Rules
The rules for trading a bull trap are quite simple and differ slightly from how most people trade them.
- Look for price to head to a major resistance level – consider looking for momentum on the approach
- The general approach is to fade the first push through if there is a reversal but this strategy will wait
- Look for price to fade
- Upon another approach, we look for a reversal to take advantage of trapped bull traders.
As mentioned earlier, I prefer daily charts for my trading. Many traders don’t like the higher time frames because they don’t like the stop loss that may be needed. That comes not from a trading issue…but a lack of account funding issue.
Traders like tight stops so they can have a larger position size. In the bull trap trading strategy, we know exactly where to place our stop and it depends on the size of the entry candlestick.
- We are in an uptrend in price so we are looking to take advantage of trapped bull traders in areas where they will take action – resistance zones.
- Using the 20 SMA, we can see price has pulled strongly away which indicates momentum in this market. That is what we want to see. We can also fully expect price to snap back (retrace) and we know that is a common with trend trade entry. That means more bulls pile into a strong move.
- Resistance is put in an price rejects. The common trap is traded here but we want to place the odds strongly in our favor
- This is the second approach with a momentum break (not required). Price immediately rejects and eventually topples 1258 pips before price starts to make its way back up (not shown)
Your entry for this trade is simple and so is the stop loss:
- Enter the trade on a break of the lows of the reversal candlestick
- We know we are wrong when the high is taken out and that is where our stop will go.
The risk to reward in our sample trade was 1 – 11.58.
Why I Prefer This Trading Strategy For Bull Traps
Let’s take a moment and think what is happening during the above chart and what traders may be thinking.
- We are in an uptrend and price is put in a higher low (the retrace), and then started to advance again.
- There is bullish momentum in the market which is want we want to see when taking longs. Traders are looking to get long on pullbacks and breakouts
- A common sight – resistance. Traders will see that in the context of an uptrend and look for breakouts and up trend continuation.
- Price breaks resistance with strength and traders pile in to grab the continuation move. Once they see they are wrong footed, you can see how the red candles start to become more bearish.
Remember – – – We are trading other traders and their decisions.
Pitfalls In Trading The Bull Trap Strategy
Every Forex trading strategy will have a weakness and this one is no different.
It is pure price action and does require some subjectivity. The issue is that many traders “think” they see a setup when none truly exists.
Some traders will have difficulty finding resistance levels that matter. The trick is to “zoom out” so the turns really stand out. This way you will only see the pivots that matter.
Advantages Of This Strategy
We are confirming through the first step that traders are still interested in longs. The market is still showing the upside strength which makes a sudden reversal even more powerful.
You know exactly where to enter the trade (break of reversal candlestick) and exactly where to exit (break of highs).
The risk to reward profiles can be quite large especially if you are fortunate enough to catch a major trend change in the market.
You can easily scan many currency pairs for setup trading signals by looking for extensions from the moving average and plotting a horizontal resistance line at the pivot.
This is one of my favorite swing trading strategies due to the simplicity of the trading setup. Just make sure you lay out a trade plan and back test so you can become an expert at trading it.