Bear Trap

When traders expect a bullish trend to become bearish they often get caught in a bear trap where the price may show a deeper pullback but later ends up continuing the bullish trend. You can use Pro bundle to detect bear trap scenario's (or fake outs).

Cheat Sheet To Identify Pullbacks

Referring to below diagram

1. Weak pullback occurs when the price retests the inner band support level

2. Strong pullback occurs when the price retests the trading line support level.

3. In a bullish case, weak divergence is created when price action has moved from the region above the trading line to the inner band below the trading line.

4. In the same scenario, strong divergence is created when price action has moved from the region above the trading line to the outer band below the trading line.

Lets analyze below chart and focus on "Bear Trap 2" scenario:

1. Trading line is showing a bullish trend. Price is currently in the upper bands and hitting its resistance level. As traders start taking profits, price slowly enters the inner band and tests the trading line support level. (strong pullback)

2. Low risk trading zone has ended as marked by the black background. (bearish)

3. In the lower charts, weaker divergence pattern is building up between the pink and yellow lines. (bullish)

4. Squeeze has begun and price moves below the trading line. (bearish)

5. Weakness arrows are displayed indicating strong downside momentum. (bearish)

6. Cyan Candle: In the lower charts, weaker divergence pattern is playing out and yellow line is attempting to close above 20 mark. As a result, a high risk long signal (cyan candle) is displayed as part of a divergent setup. (bullish)

7. Chart prints a green candle and price moves above the trading line resistance level. (bullish)

Which of the above events contributed to a bear trap scenario?

It is not possible for a trader to accurately predict the next price movement but one can make an informed decision based on the above information. Events 2,4,5 provided signals for a bearish trade. At the same time, pro bundle displayed a bullish divergence and identified the price action was inside a high risk trading zone. As the divergence traded out, it validated the bear trap scenario.

What is the importance of a divergence setup?

When a chart is trending, price will often pullback or show a divergence opportunity. Some pullbacks are minor and others may look like a fakeout. If the chart shows a divergence then price will most likely merge into the main trend as long the momentum line continues the main trend. As a trader, if you can distinguish between a strong or weak divergence then you can gain an edge and trade accordingly. The pink line (aka momentum line) is an absolute money saver. If the pink line stays above 50 mark then the current setup can be concluded as a bearish trap. Feel free to try it on other charts and you will know it!

What is the difference between the 3 bear trap scenario's shown on the previous diagram?

This is an important question and often traders face similar scenario's where they need to decide if they should buy the dip or not. Pro bundle helps distinguish between these scenario's.

All 3 bear trap scenario's show price trading in a high risk zone below the trading line. Once the price breaches the resistance level of the trading line, low risk zone kicks in with strength arrows and the bullish trend continues.

Bear Trap 1

Condition: Pink line moves below 50. This is considered extremely bearish and has high potential to change the main trend.

Shortly, after closing below 50 the pink line bounces back above 50. This implies the main trend (bullish) is still intact. along with the yellow line.

Trigger: Yellow line has moved below 20 while pink line is close to 50. This creates a bullish divergence and the trigger is yellow line closing above 20 which causes the price to enter inner band and breach the resistance level of the trading line.

Bear Trap 2

Condition: Pink line moves close to 50 and stays above 50 at all times.

• This is considered bearish if the trading line shows a unconfirmed bearish trend (light red). This has potential to change the main trend.

• This is considered bullish if the trading line shows a unconfirmed bullish trend (light green). This has less potential to change the main trend.

Trigger: Yellow line has moved below 20 mark while pink line is above 50. This creates a bullish divergence and the trigger occurs when the yellow line closes above 20 mark. It causes the price to enter inner band and retest the resistance level of the trading line. There are 2 bullish divergence patterns in "Bear Trap 2" scenario.

1. Bullish divergence pattern 1: This has been marked as white circle on above diagram (left circle). Notice the first one pushes price to enter the inner band and retest the resistance level of the trading line. For a short duration, the trading line turns bright red confirming a bearish trend. Soon after, price moves back into the outer band creating another bullish divergence.

2. Bullish divergence pattern 2: This has been marked as white circle on above diagram (right circle). This pattern forms in a shorten span of time and cyan candle is displayed indicating a high risk long signal is in play. Soon after, price breaches the resistance level of the trading line and enter the outer band.

What is the critical difference between the 2 bullish divergence patterns discussed above?

Pattern 1 did not trigger a high risk long signal but pattern 2 triggered it by showing a cyan candle (marked as left and right white circle on above diagram). This signal takes other customized variables into consideration which indicate divergence pattern1 had a higher chance to push price lower while divergence pattern 2 had a higher chance to push price higher. This indeed provides an edge as you are able to distinguish between an ongoing bear trap scenario (with potential to change the main trend) versus a weak bullish divergence pattern (with potential to continue the main trend).

How to invalidate a bear trap scenario?

Lets analyze the chart by looking at the events after "Bear Trap 3" scenario where the trend changes:

1. Bullish trend has ended and price has breached the support level of the trading line. (bearish)

2. Squeeze has begun and weakness arrows are shown indicating strong downside momentum. (bearish)

3. Trading line has confirmed a bearish trend. (bearish)

4. In the lower chart, we can see multiple bullish divergence patterns but the pink line is consistently making lower lows.

5. Second squeeze has begun and yellow line moves above the pink line forming a bearish divergence pattern. (bearish)

6. Squeeze breakout occurs and pink line moves below 50 mark. Low risk bearish trading zone has begun. (bearish)

The most important event in the above scenario is when the bullish divergence pattern transforms into a bearish divergence pattern and the pink line closed below 50 mark. These are the underlying conditions that invalidated the bear trap scenario and started a bearish trend.

You can apply the same rules to "Bear Trap 1 2 3" scenario's discussed above and you will notice that they do not satisfy the 2 key conditions. You can apply the fundamental principles of the Pro bundle and avoid bear traps on any chart.

What is the importance of a high risk trading zone?

When you are trading in a low risk trading zone, its easier to make profits as the chart is trending and momentum is strong. It is quite the opposite in a high risk trading zone where price may be range bound, volatile or not trending.