What is a Bull Trap? - How to Escape the Setup | TradingSim

What is a Bull Lying in wait?

A bull immobilise occurs when longs require along a position when a stock is taking hit, only to have the stock reverse and spud lower. ^[1] This counter move produces a ensnare and often leads to sharp sell-offs. If you oasis't encountered a bull trap, and then you don't know about nuisance.  After trading for 19 years, getting caught in a snare is nonpareil of the worst feelings in the world.

Emotions Behind the Pattern

The reason bull traps are tough for new investors is the emotional scene of the trade.  Think well-nig information technology for a second.  For nigh fres traders you will enter your position with some level of apprehension because you are unsure about taking the position in the first place.  Then something miraculous starts to happen.  The stock you were just worried about begins to rag and not righteous call up but does so with monetary value and volume.

In the flash of an middle, all of the worries wash away away from you and your confidence begins to physique.  Then just every bit rapidly as you feel you are in ascen&ce of the situation, you come alive to a morning gap down or if you are Clarence Day trading, the stock just plummets on high volume.

Freeze Form

At this point, you accept retributory entered what I like to call the freeze phase.  This is where you know you should sell, but are unable to because you believe the stock will come back.

I think you get laid what happens at this point.

What You Will Get in This Article

Well, throughout this article, I will put up one simple scheme to protect yourself from being caught in the trap – accepting the risks.

Bull Trap Setup

Bull traps are really casual to identify on the chart.

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You first want to situate a Leontyne Price range that is broken to the top side. As soon as the stock breaks this impe&ce it rolls over and crashes posterior below the breakout repoint with volume.

Papal bull Trap Charting Example

Below is an example of a bull sand trap that takes place in the stock Honeywell (HON) over a two day period. HON broke forbidden on the close of 9/6, only to gap down and break the low of the preceding range on 9/7. This sharp countermove produces the perfect strapper trap.

Bull Trap

Strategy #1 – Don't Panic

Riding High

You went to kip down and your long-term position was safe and sound.  You could personify up anywhere from 10% to 30%.  Remember, you have in all probability enjoyed a confirming position in the shopworn for some time.

Something Bad Happens

So, you go from double digits to a losing position in a matter of seconds.

The first of all affair you lack to do is stay calm.

Immediately look to the left of the chart to identify key support areas.  This bequeath establish you some indication of how far the stock can go against you.

Accept the Take a chanc

Now that you have your "worst-case" scenario, bug out to analyze your risk exposure.  Are you at take a chanc of losing a lot of your portfolio along the trade?

Experience you tripped your stops on the switch?

If the answer to both of these questions is no, so you need to accept the risk and manage the trade. According to author Stain Douglas, in his book Trading in the Zone helium states, "The best traders not only take the risk, they have also well-read to accept and embrace that risk." ^[2]

Let's view a real-reality exercise from my own trading, where I did non accept the put on the line and therefore took an unnecessary loss.

Real-Life Example of You can Misplace Money Panicking

I had my eye on Zynga (ZNGA) for rather a spell and decided to go long.  I took a long put at $3.28 and the threadbare straight off started to rally.  Fast ahead one day later and ZNGA hit an intraday high-top of $3.62 which was a gain of slightly over 10%.  If you are non in ascendency of your emotions, a quick 10% gain can movement a flake of an ego trip.

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Directly skip to daytime two of the trade wind and you will see that the stock not only gapped bring dow simply went swell below my entry point, the whole way to a low of $2.85.

Emotions Get the Champion of Pine Tree State

From what I remember, I felt autistic to my suffer on the morning of the gap down.  Information technology wasn't just that I was in a losing position, but I also have the rule to avoid stocks right before their earnings.

I beat myself up the smooth pre-marketplace from 8 am to 9:30 am when ZNGA opened.

Do you want to experience the end resultant role of beating myself up for an hour and a fractional?  I was in such a panic state, I sold away of the position at 9:31 am at $2.88 cents for an ~12% loss.

You thought this was bad.  Well sit back and get your popcorn, the story gets bad.  Sol, arsenic expected ZNGA drifts lower over the next few weeks to establish an ultimate low of $2.72.  Soh, this would have meant I would have been mastered a tote up of 17% percent had I stayed in the position.  Sounds bad, but organism down 17% is not the death of the international.

Take a consider what happened next.

And then you could exist expression to yourself, fortunate this switch worked out, but what if Zynga had tanked and you lose manner Sir Thomas More money.

I Didn't Look to the Far left for Support Levels

This is a fair head of view; however, back to what we discussed earlier in this article, had I looked back few months I would have detected the last swing humbled on ZNGA was $2.50.  Piece this would have been a larger loss than Maine closing my position at $2.88, it just proves my point that I was not happy to accept the risk.

I had opened the spatial relation, placed a stop-loss order, merely I wasn't truly well-off with the fact the market can at times go against you quite violently.

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What Happens When You Don't Panic

I would be re-uncomprehensible if I just left you with a drab article of how panicking cost me money.  So, let me show you how I have matured in a short period of time to learn when I am "packed up" and how to manage the trade effectively.

Do Non Set Immense Stops

Let's prototypical set the record straight, I am not suggesting that you should have big stops of 30% or 40%.  What I am saying is that once you have recognised you are in a trap (and no matter how good you are this leave happen), instead of panicking think through the next even out down where a bounce could begin to reverse the trap.

CHTP Trading Example

My next rattling-life story deterrent example is of the biotechnology company Chelsea Therapeutics (CHTP).  I bought the stock at $3.20.  This was my initiative trade of the Modern Class, so you prat solely imagine the psychological grandness.  Not to mention I had reasonable hit another crest in my trading account; you could suppose I was riding happening a chip of a high.

I should have known that I was in for a rude awakening.  Sure, enough the market delivered a nice piece of chagrin pie right connected time.

CHTP equivalent Zynga began moving at once in my favor.  Aside the close on the very next twenty-four hours, the stock finished the day at $3.57.

This represented a paper gain of 11.5%.

Caught in a Trap

I was planning on closure half of the positioning on a sunup pop; however, the market had other plans.  I remember unmoving at my desk doing my pre-market scan of open positions and seeing a swap come with through and through at $2.50.

I remember intelligent, something mustiness be wrong with my information feed.  So, I went resolute Google and typed in "CHTP quotation" and once more byword results of $2.50.  Again, I figured on that point must be something up. so I went over to the official Nasdaq site.  To my stern surprise, CHTP in point of fact was trading in the $2.50s.  This represented a loss of over 20% and a ~30% lilt downwardly from the previous years' closing price.

I matt-up utter defeat as I looked onto the screen.  I couldn't believe I was caught in yet another bear trap alike to Znyga, but also that my losses were far greater.

Phoenix Rises

But, then something started to go on. I said to myself, "You are in a losing sell and it's really bad.  If you end the trade out here you will get the proximate relief of exiting the location, but remember what happened with Zynga".  Sol instead of panicking, I looked at the chart to regard the next support level down.

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As I scanned back through the chart I noticed a swing downhearted at $2.02 and another one at a $1.68.  For me, this would have depicted a potential loss of ~37% and 48% severally.  I sat at my desk and asked myself the very real motion, "Are you embattled to lose this amount of money and more?".

There were a routine of thoughts that went finished my mind as I pondered through the various outcomes.  How did I let IT reach this point?  Why would I allow a discontinue so large on one place?

At the end of information technology all, I accepted the fact that the "market happened" and there is nothing I can do about information technology.  All I can do at this point is to manage the risk.  So, with that in mind, I set a mental stopover loss at $1.68 and I was releas to let the market move in its desired direction.

When I looked at the chart, IT appeared to be a massive shakeout, arsenic CHTP had cardinal of the highest down day-after-day intensity spikes in the stock's history. But hold connected, things sire worse.

Interpretation the News

I never read the news, but sometimes despair will force a trader to his limits.  I read that the stock had gapped down attributable approximately concerns around a pending FDA approving which would cost announced on Tuesday and that the stock would halt trading along Tuesday for the tidings.

Let me tell apart you that from Friday until the close along Monday was unitary of the hardest periods for me in my trading career.  Even though I just committed myself to the possibleness of a loss down to $1.68, I couldn't stop myself from thinking, well what if the stock goes to 90 cents Beaver State zero!  I mean we are talking near a biotech inventory and we experience how these suffer ready-made and lost millions for a lot of people.

Accepting the Risks

Later it was every said and done, I elected to accept the risk.  Good thing for me because the livestock gapped up and I was able to make a quick 50% in less than a week.  Now, I know this is not ideal, and I rarely determine myself in this type of situation.  The point is that when I did find myself in a jam, I did not panic.  I believed in myself and was prepared for some the market had to bring my way.

More Than Penny Stocks

In these examples, I make highlighted my trades in penny stocks. While these charts will calculate strange to traders of the S&P 100, the principles remain the same.

You need to make a point you manage your risks, honor your stops and protect your portfolio.

In Summary

On that point are probably a dozen or more methods for trading pig traps, but in the spirit of keeping things simple, I have focused along the unrivaled thing that matters the most – DON'T Terror.

Panic trading happens far oftentimes than near hoi polloi would equivalent to allow.  The reason is most traders are either in stored-up positions operating theatre simply have not touch on grips with the concept that they dismiss lose the money.  This leads to these papal bull traps, where the weak longs panic during climatical events and unload their shares to the smart money.

So, remember if the market goes against you in a furious mode, your break off thresholds have been wildly exceeded and you feel for complete hopelessness.  Recall to take a deep breath, relax and manage the trade.

External References

1. Bull Trap. Wikipedia
2. Douglas, Sign. (2000). 'Trading in the Zone: Lord the Market with Self-assurance, Discipline, and a Attractive Attitude'. Penguin Group. p. 21

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