Why BEAR-TRAP occurs? How to Avoid and Trade a BEAR-TRAP?What is a BEAR-TRAP?
--> BEAR-TRAP is a condition in the market where the Price gives a Breakdown below a Potential Support zone but quickly Reverses back above the Support without giving a follow up bearish candle.
Why a BEAR-TRAP occurs?
--> Big Players who are bullish on a specific stock would be wanting to buy a big quantity of shares at the best price , but there will be no enough sellers . Hence All Buy Orders of Big Players would not get filled. so what's the solution?
--> Big Players know that the Retailers have maximum of their StopLoss order's just below the Support.
--> Big Players will place Contra-Short Trades and will trigger the Stop-Loss Orders of the Retailers turning them into a Seller .Hence All Buy Orders of Big Players will get filled. .
--> New Breakdown Traders place Fresh Short-Sell Orders looking at the Breakdown and if its a F&O stock , Call-Sellers open new positions at ATM (At the money) Strikes. .
--> Now as All Buy Orders of Big Players got filled. . BIg players aggressively start moving the price up and trigger the Stop-Loss Orders of the New Breakdown Traders and Call-Sellers who entered looking at the Breakdown which ,again shoots up the price.
-->Hence All Bears are been Trapped.
How to avoid a BEAR-TRAP ?
--> Look at the Volumes on the Breakdown ! If the Volumes are Low , It is probably a Fake Breakdown! .
--> Wait for a follow up Bearish- Candle after the Breakdown Candle! i.e Take a entry only when the Low of the Breakdown-Candle breaks.
--> Check out if there is a significant Long-Unwinding if its a F&O stock.
How to trade a BEAR-TRAP ?
-->Check out for a Reversal Pattern soon after the Breakdown. Eg: Bullish Engulfing, Bullish Harami, Bullish Piercing .etc
--> This Reversal Candle Stick must close above the support.
-->Enter a Long Position above the high of this reversal candle .
Real Example!
--> NSE:POWERGRID was trading within a Rising Channel .
--> POWERGRID gave a Rising Channel Breakdown below 196 and gave a daily closing at 191. Perfect breakdown right?
-->Breakdown Traders entered here keeping their Stoploss above the POC or just above Psycological level 200. and Call Sellers would have Shorted the POWERGRID 200 CE STRIKE .
--> Check out the volumes on breakdown! Its very very low signifying its a Fake Breakdown.
--> POWERGRID on the following day made a Bullish Above Stomach Candlestick pattern and gave a closing above the support level 196.
-->Perfect Buy would be on 1HR Closing above the support level 196 on the next day.
-->Boom! Price made an Impulsive Movement after it triggered all the StopLoss Orders placed at Psycological level 200 by the Breakdown Traders and also due to the Short Covering at 200 CE STRIKE .
--> Wasn't it a perfect BEAR-TRAP Trade?
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