How to Trade Bull and Bear Traps Gives an Edge

The key to success in all areas of life is to have an edge and the financial markets are no exception. Being faster, wiser, or wealthier never hurts when achieving goals. Whether you are a long term investor, short term swing trader, or intraday trader, having an edge will put you ahead of the crowd. Understanding the psychology of markets and knowing how to trade bull and bear traps is something that few understand which leads to a huge edge for those that do.

Below is a chart of the Dow Jones Futures contract, open almost 24 hours of the day. Each red or green bar represents a 15 minute period. On the very left is 9:30PM EST Thursday August 8^th, and on the very right is Fridays August 9^th’s close at 5PM. On the top of the chart is a red shaded rectangle starting about 10:30PM Thursday night extending to the right of the chart, this is known as a Bull Trap. A Bull Trap is an area where traders buy the market when it moves higher than a previous high causing an abundance of buy orders, but in the process this leaves no buyers remaining to continue the market rally. We then can determine that if there are no more buyers, the sellers now outnumber the buyers. Just when the markets were taking off, this Bull Trap crashed the party at 9:45AM as the chart shows, which lead to a 167 point drop. What a bad day for those participants who don’t understand market psychology!

Following the market drop at 9:45AM price sold down to the green rectangle which is known as a Bear Trap. This is basically the same scenario as above in reverse. As price pushed lower than the early morning lows made from 6:15AM-8:45AM, those who bought at higher prices threw in the towel panic selling. This selling creates an abundance of sell orders leaving no more sellers to continue the move lower. With more buyers than sellers the market then moves higher just about the time everyone panic sold for a loss. Also on the bottom of the chart is a Tick Index Flush, which is basically an RPM gauge of the market. The Tick Flush indicated that selling was potentially coming to exhaustion and to be on the lookout for an entry to buy the market, which then rallied 104 points from the lows of the day.

These whipsaw days can be frustrating and costly for those without an edge, but for those who learn how to trade bull and bear traps these days can be very profitable! Understanding the psychology of these areas Friday in the SRT Live trading room prevented us from being victims in these traps.