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  • In falling markets, traders need to be on the lookout for what are calledBull Traps.”

  • A bull trap refers to a short-term rally during a downtrend thattrapsthe bull who

  • mistook it for the start of a new uptrend.

  • As a matter of fact,

  • some of the largest up days in history have occurred in during bear market cycles.

  • Why does this happen? After a prolonged bull market, investors have been conditioned to

  • buy the dip.” After a sharp decline, “dipbuyers step in and the market starts

  • to rise a bit. This initial rally then encourages other investors who think the worst is over

  • and become fearful of missing outcreating a cycle of yet more buying. A temporary rise

  • in prices may also force some short sellers to buy back shares to protect their profits,

  • leading to even more buying.

  • At some point, though, traders who held tight through the start of the downtrend will come

  • to see this temporary rally as an opportunity to offload losing positions at a slightly

  • better price. These sales, combined with short sellers re-establishing their short positions

  • at the higher prices, may send stocks back into their pre-rally downtrend.

  • So what does a “bull trapactually look like? Here's a prime example from 2008.

  • At the end of October, the S&P 500 had a large up day, which many traders took as a sign

  • that the worst was over. But after a few more days of gains, peaking on November 4th, the

  • sellers soon returned and pushed the market to even lower lows. The S&P 500 dropped

  • 25% from its November 4th closing high to its November 20th closing low. That's a

  • massive amount of market damage in less than three weeks.

  • So how do you know if you're looking at a potential bull trap? We'll cover that

  • in the next video.

In falling markets, traders need to be on the lookout for what are calledBull Traps.”

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B1 US bull rally market trap november short

Trading Up-Close: Bear Markets & Bull Traps

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    洪子雯 posted on 2020/06/13
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