Being caught in a bull trap can be SO frustrating …
You think you’re seeing a perfect buy signal, like a stock breaking or ricocheting, so buy. Then the stock quickly turns around and moves the other way.
You might think you have a natural ability to keep stocks falling after buying them. But you could just have been caught in a bull trap.
So the question is what are you going to do about it …
Will you hold on and hope that your trade has to work and the market owes you something? Or will you quickly reduce losses and accept if you are wrong?
That can be the difference between blowing up and success in the long run …
In this post I am going to explain what a bull trap is and what to do if you are trapped in one. Also, I’ll give you some tips to help you spot them so you can avoid that frustrating trader trap.
What is a bull trap?
A bull trap is a term used for a failed follow-up movement of a buy signal.
There are a ton of chart patterns that traders interpret as either bullish or bearish. When a bullish pattern emerges, it becomes a buy signal for long traders.
If the pattern fails, it is called a bull trap.
It means that bulls are trapped on the wrong side of the trade and will have to take a loss to get out.
The opposite of a bull trap is a bear trap. It happens when a short sell signal is reversed. That means you have to buy shorts to cover losses. This can trigger a quick squeeze if enough shorts are trapped.
It’s important to know that not all patterns will work every time. Just learn to accept it. Even the best traders don’t win 100% of the time. It is not possible. I’ve been trading penny stocks for over 20 years and I’m winning roughly 77% of the time. *
Therefore, rule number 1 is to reduce losses quickly. Later more…
New to Penny Stocks? Get my FREE guide to trading this niche here.
How to identify a potential bull trap – 4 indicators
Here are some tips that can help you identify when something is wrong with your setup or trade …
And when in doubt – get out. Most of the time, I don’t even wait for a loss to get out of a trade. If a stock does something I don’t expect, I’m out. Then I go to the next one.
# 1. Lack of volume
I always look for high volume in the stocks I trade. Liquidity is a crucial indicator. I want a lot of traders to take an interest in the stock and trade it. That means I can get in and out of trades quickly.
So when I am looking for a buy signal I want to see high relative volume to confirm the move.
Lack of volume on buy signals means that no one else is interested. The move is likely to fail and you will be trapped in a bull trap.
# 2. Failure to break out
A failed outbreak – or a fake outbreak as I like to call it – is another bull trap.
Breakout patterns are some of the simplest and easy to spot for new traders. And yes, breakouts are great, but they don’t always work. That’s why I never buy in anticipation of an outbreak …
I am waiting for the stock to prove it can break above resistance. And even then, it’s not a guaranteed win …
A stock could break out, but then consolidate and drop below the breakout level. This is a failed breakout. Reduce your losses or take your small winnings and exit.
For me, breakouts work best on stocks that are newer runners with a lot of volume and ideally a catalyst.
# 3 The share is tied to the reach
Range-linked stocks are boring. When stocks get stuck in a channel, the bulls and bears fight it. The cops can’t make it break out, and the bears can’t make it break down.
The stock only moves between support and resistance levels.
I stay away from such deals. I like to trade big meaty, volatile moves. Why focus on stocks that are in a channel? I want action and potential.
Beware of these stocks. You could break out or collapse. Nobody knows. There is no benefit and little risk / reward.
# 4 RSI indicates overbought
Personally, I do not use chart indicators in my trading. However, when many traders look at the same indicator, it can become a self-fulfilling prophecy. This is why you need to understand multiple indicators and many different facets of the market.
When the relative strength index (RSI) shows that a stock is overbought, it usually means that the stock is ready for a trend reversal.
That means many buyers are already in stock and are likely looking for a way to take profits.
If you see a breakout or bullish flag pattern, but the RSI indicates that the stock is overbought, the stock may be lacking the buyers it needs to put more pressure on.
Sounds great in theory, doesn’t it? Let’s look at a …
Example of a bull trap
Now let’s look at an example of a bull trap so you can see what it looks like on a graph.
vTv Therapeutics Inc. (NASDAQ: VTVT) is a biotech company. On April 13, the company announced that the FDA had awarded a breakthrough therapy for the potential treatment of type 1 diabetes.
You can see on the chart that the stock has gone up on the news. It rose from around $ 2.80 to a high of $ 3.79 on a volume of around 255 million shares. There was also a multi-month break above the $ 3.59 high from February.
But the stock couldn’t hold the breakout level. It closed below $ 3.59 and then faded for the next few days. The outbreak was a bull trap.
The many big red candles after the failed outbreak are a good example of why you should never hold and hope. Learn to cut losses quickly and move on.
If you look at the intraday chart, you can see that the stock was already over-stretched by the time it hit the multi-month breakout level. The circle shows the multi-month breakout level from the daily chart. The arrow indicates that the RSI indicator is overbought.
The stock has also doubled from the daily high of $ 3.80. This is another sign that the stock has failed to follow with its upward momentum.
What’s the ultimate tip to avoid getting stuck in a bull trap?
Always follow rule 1
Following trading rules is essential to your trading success.
Reducing losses quickly is rule # 1 for a reason.
How to stay safe on the trade battlefield. And it’s the best way to protect your account if you get caught in a bull trap.
Make it your goal to stay in the game and not get rich quick.
I never hold or hope, go all-in or use levers. These are bad habits that I try to avoid as newcomers.
I’m trying to convey a safe and conservative approach to trading these sketchy penny stocks. I take small wins and even smaller losses – that is the key to my success in the market over time. *
The market is never wrong. You have to respect it, contain your losses, and adapt.
It doesn’t matter how much you make, just be disciplined. Follow the rules and the process. The money may come in the future after you study your bum and put it into work.
The bottom line of the bull trap
Getting caught in a bull trap can be frustrating for traders. Avoid this by looking for multiple indicators that need to be aligned before making a trade.
And when in doubt about a trade, don’t take it. Watch it and see what happens. Or paper trading on StocksToTrade. Learn for next time.
If you find yourself in a bull trap, reduce losses quickly. You cannot control the markets. Accept when you are wrong and move on.
Keep your losses smaller than your profits. This is how small profits add up over time. This is how I have grown my account to over $ 7 million in more than 20 years of trading penny stocks. *
And that’s what I teach students in my Trading Challenge. I want to be the mentor to you that I never had. But I don’t accept all of them. You have to apply.
If accepted, you get access to my library of thousands of video lessons, archived webinars, all of my DVDs, and access to my challenge chat room. Plus weekly Q&A and live trading webinars from myself and other millionaire traders like Mark Croock, Tim Grittani and Michael Goode. *
Don’t apply if you want to pick hot stocks and get rich quick.
I want dedicated students willing to learn the right process, attitude, and rules to grow their accounts over time. It doesn’t happen overnight. And it’s not easy.
Are you ready for the challenge? Apply today.
Have you been caught in a bull trap? What did you do? Let me know in the comments … I love hearing from my readers!
Disclaimer of liability
* Please note that Mark Croock, Tim Grittani and Michael Goode trading results are not typical. Most traders lose money. It takes years of dedication, hard work, and discipline to learn how to act. Individual results vary. Trading is inherently risky. Before entering into a trade, remember to do your due diligence and never risk more than you can afford to lose. I also hired Mark Croock, Tim Grittani, and Michael Goode to help in my education business.
This level of successful trading is not typical and does not reflect the experience of the majority of people using the services and products offered on this website. From January 1, 2020 to December 31, 2020, typical users of the products and services featured on this website reported an average of an estimated profit of $ 49.91. This number comes from tracking user accounts on Profit.ly, a platform for the trading community. Timothy Sykes has a minority stake in the platform. The typical success rate of users was based on the following methodology:
- From January 1, 2020 to December 31, 2020, 849,078 trades were uploaded to Profit.ly. 633,891 trades were “verified” (confirmed with trading account details).
- Instructor trades are ignored.
- The average income statement / trades is determined by calculating the total P&L and dividing by the total number of trades
- The average trades per account are obtained by counting the total number of trades and dividing by the number of accounts (middle function).