The Sneaky World of Trading Traps: Bull and Bear Fights
Trading can sometimes feel like a game of hide-and-seek. You think you've found your way to success, but suddenly, the market throws a curveball. These curveballs, are what traders call "traps." They come in two : Bull Traps and Bear Traps. Let's dive into this where prices deceive traders, and big players play some tricks.
Bull Trap
Imagine you're in a race, and you see a finish line up ahead. You sprint towards it, thinking you're about to win. But as you get closer, the finish line moves farther away, and you realize you've been tricked! That's a bit like a bull trap in trading.
In the trading world, a bull trap happens when prices seem to break out to the upside. So, traders excitedly buy in, thinking they're on the road to the moon. But guess what? The market suddenly changes its mind and does a U-turn, leaving those traders scratching their heads and counting their losses. Ouch!
Bear Trap
Now, let's flip the script. Imagine you're on a rollercoaster, and it's speeding downhill. You hold on tight, thinking it's all downhill from here. But just when you start getting comfy, the rollercoaster goes back up instead! That's a bit like a bear trap.
In trading, a bear trap happens when prices look like they're going down. So, traders start selling, expecting to make a fortune from the falling prices. But wait, the market has other plans. It suddenly pulls a surprise move and starts going up, leaving those traders feeling as bewildered as if their rollercoaster suddenly reversed direction.
Why Do Traps Happen?
Now, let's talk about the reasons behind these traps. You see, it's not just random market mischief; there's a method to this madness.
Imagine a puppet show. The big traders, institutions, and market makers are the puppeteers, and the market is their stage. They have strings attached to the prices, and they pull them to make the puppets dance.
Why do they do it? Well, they want to make more money, of course! By creating these traps, they can manipulate the market to their advantage. They can make prices seem like they're going one way, luring in traders, and then pull the strings to make prices go the other way, trapping those traders and taking their money.
Big traders sometimes need a lot of "trading juice" to enter or exit their positions. To get that juice, they create traps.
Here's how it works: Imagine you're at a lemonade stand. The big traders are thirsty for a lot of lemonade (liquidity), but they don't want to pay a high price for it. So, they create a trap by making prices look really attractive. People start buying and selling, thinking it's a great deal. Then, the big traders swoop in, quench their thirst, and leave others holding the bag.
I used that analogy again in another post
Traders often react emotionally to news. Good news makes them optimistic, and bad news makes them pessimistic. When a big piece of news drops, it can trigger rapid price movements that seem like genuine breakouts. But here's the trick: those movements are often just temporary reactions.
Of course there are other more technical reasons that traps might happen but i decided to mention the reason that are more common and easier to understand when you start out if one understands and starts being more caution when trading then the other reason will soon be followed without me writing about them.
Links to read
https://www.investopedia.com/terms/b/beartrap.asp
https://www.investopedia.com/terms/b/bulltrap.asp
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