trap trading strategy

If you know how price action works and want to take your trading skills to the next level, you must consider learning the Trap Trading Strategy. In this post, I will explain everything you need about Trap Trading Strategy.

What is the Trap Trading Strategy?

The Trap Trading Strategy involves capitalizing on trapped traders who get trapped with false breakouts or breakdowns. Another way of looking at it is as “high expectation turned disappointment” levels for some traders. There are bull traps as well as bear traps.

It's important to understand that traps happen at both trendlines and horizontal levels. Besides, sometimes, traps may occur at reversal levels as well.

Before jumping into how we can capitalize on trapped traders, it's essential to understand how to avoid falling into a bull or bear trap. To avoid false breakouts/breakdowns, you need to bear in mind the following points:

  • You must observe the chart on a 15m timeframe for trading.
  • You must avoid parabolic moves.
  • A breakout or breakdown after a good consolidation is more reliable.

What is a Bull Trap, and how do you trade it?

A Bull Trap occurs at a breakout level, trapping the buyers. While the buyers expect the price to go higher, it's taken over by high selling, eventually taking the price down, leading to a false breakout. Once you spot a high-selling candle, usually through a Pin bar or a Bearing Engulfing candle, you can enter a position at a pullback. If executed well, chances are that you will make a good profit.

trap trading strategy

What is a Bear Trap, and how to trade it?

A Bear Trap is the opposite of a Bull Trap, meaning sellers get trapped at a breakdown level. While many sellers expect the price to go down further, buyers take over and take the price up again, leading to a false breakdown. Once you spot the high-buying candle, which may be a Pin bar or a Bullish Engulfing candle, you can plan an entry at a good pullback. If executed well, you have a higher chance of making a good profit.

trap trading strategy

How to plan an entry in Trap Trading Strategy?

Even if you succeed in spotting the Trap candle, you will only work if you plan your entry well. It is the most crucial part of trading. You must enter a position at a good pullback.

The conventional way to do this is to wait for a follow-up candle. For example, if the direction of the trap is a downtrend, you will need to wait for another red candle to break the first candle's low. It serves as a confirmation. Next, you can enter a position at a pullback to the same breakout level.

Some traders prefer entering a position at a slight pullback in the second candle to the trap candle. If you are wondering how much a small pullback is, that differs from trader to trader. While some traders expect a pullback to the low of the Trap candle (in a downturn), others might expect the pullback to go up a little higher.

Another way to determine a pullback would be to plot the Fib Retracement on the Trap candle and plan an entry at 0.2. However, as already pointed out above, you must read the chart on at least 15m for Intraday to be accurate with the levels.

How to Plan Your Target in Trap Trading

Target is totally based on your money management and hence, it's always wise to build a money management plan before jumping into trading. Your money management will help you take quick yet right decision. In Trap Trading, there is a high possibility of a big move in your favor. Hence, you can keep your risk-reward ratio up to 1:3. However, if you aren't ready for a higher risk-reward ratio yet, you can keep it 1:1 and no lesser than this.

You may also like: Support and Resistance Trading Strategy.

Conclusion

I have walked you through the various essential aspects of Trap Trading Strategy. While there is no end to learning in the Stock market, the Trap Trading Strategy has evolved as one of the most practical and profitable trading strategies. However, to be good at this strategy, you must have the patience to analyze every breakout and breakdown well before entering a position. Besides, I have mentioned the essential things to bear in mind to avoid falling into a Bull or Bear Trap.

Trap Trading Strategy FAQs

What is the Trap Trading Strategy?

The Trap Trading Strategy involves capitalizing on trapped traders who fall victim to false breakouts or breakdowns in the market. It focuses on exploiting “high expectation turned disappointment” levels for traders, encompassing both bull and bear traps occurring at various levels, including trendlines and horizontal levels.

How do you avoid falling into a market trap?

Avoiding traps requires specific considerations:

  • Observing the 15-minute timeframe for trading.
  • Steering clear of parabolic moves.
  • Trusting breakouts or breakdowns after significant consolidations for more reliability.

What constitutes a Bull Trap, and how can it be traded?

A Bull Trap occurs at a breakout level, luring in buyers who anticipate higher prices. However, high selling pressure takes over, leading to a false breakout. Traders can identify it through candles like Pin bars or Bearing Engulfing candles and position themselves after a pullback for potential profit.

What characterizes a Bear Trap, and how can it be traded?

A Bear Trap involves sellers getting trapped at a breakdown level. Buyers take control, causing a false breakdown. Traders can recognize it through high-buying candles like Pin bars or Bullish Engulfing candles and position themselves strategically after a pullback to capitalize on potential upward movement.

How can an entry be planned in the Trap Trading Strategy?

Planning an entry involves critical steps:

  • Waiting for confirmation with a follow-up candle after spotting the trap.
  • Entering at a favorable pullback, this can vary among traders.
  • Using techniques like Fib Retracement (at 0.2) on the trap candle and analyzing charts at no lesser than 15-minute intervals for accurate intraday readings.

What's the significance of entry planning in this strategy?

The entry planning phase is crucial as it determines the effectiveness of the trade. Even identifying trap situations might not yield profitable results without a well-thought-out entry strategy.

How reliable is the Trap Trading Strategy?

The Trap Trading Strategy is considered practical and profitable in the stock market. However, success relies on thorough analysis before entering positions and having the patience to discern genuine breakouts or breakdowns from traps.

Are there specific indicators to identify traps?

Indicators like Pin bars, Bearing Engulfing, or Bullish Engulfing candles serve as signals to identify traps, indicating potential reversals or false breakouts/breakdowns.

Is there a universal approach to determining a ‘pullback'?

Determining a pullback varies among traders. Some may anticipate a pullback to the low/high of the trap candle, while others might look for different price points or use Fibonacci retracement levels.

What's the key takeaway from the Trap Trading Strategy?

The strategy underscores the importance of patience, thorough analysis, and distinguishing between genuine market movements and traps. It's a practical and profitable approach but demands careful consideration and strategic entries to be successful.

The strategy underscores the importance of patience, thorough analysis, and distinguishing between genuine market movements and traps. It's a practical and profitable approach but demands careful consideration and strategic entries to be successful.

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