The Bear's Dilemma: Bull trap styles and bets. Anyone of a bearish persuasion always runs into the same issue when we rip like this.
If you know bull trap formation, you know they form like this. It's always tempting to fade- but if you are objective about whether you'll be right at all as a bear and also consider the different style of bull traps, you have to be aware of the risk. Because your idealised signal is stupidly strong move up, but this can also happen when a new high will be made.
Successfully dealing with bull traps in such a way as to profit big when right and do okay even if not, you have to think ahead.
If you follow my work you'll know I have a rather static style as to how I try to do this. When we're dropping into big supports, I always tend to discuss these different types of bull traps and I always try to buy where I think the low is. Citing that not only am I doing it for the immediate chance to make money long- but it's an important part of my bear plan later.
I know if I get the first trade right even just betting on a rally to the shallow retracement level, I catch between half and a third of the move up. This is going to cover my risk for what I'll spend if I get on all the bear traps and all of those setups fail. It allows me to get on them on with increasing RR. More scope for profit with a well predefined risk.
Into a rally I always look to fade the shallow bull trap. Very often that at least produces a dip. So I can often position for a 1:10 or better RR trade and generally will breakeven on the attempt if I get it wrong. Only in the times of extreme run-away moves does this fail. And I accept those are conditions I should expect to lose in.
If and when I think I am seeing signs of the shallow trap failing I get long targeting the 76 trap. Hitting this trade can be extremely lucrative and it allows me to either be sure a net profit on the swing or have the option to size my bear bets bigger aiming for a big jackpot if it works out.
When buying I consider all the main ops/risks.
Here's the new high move mentioned into the drop.
Here's the classic 76 which would also present as a head and shoulders (and butterfly) pattern now.
When I plan my bull trap trading I am always wanting to buy at the green arrows and short at the red.
I also do this with the assumption I'll be entirely wrong and lose all of my bear bets, and I try to structure it in such a way that will be massively net profitable if I hit my bull trades.
Bulls tend to show up on my posts being somewhat rude any time I do this- but this is outperforming buy and hold. At worse, I'm level when we get back to the top. Usually, I'm considerably ahead. And in the one instance the market makes the big reversal - I know I'm going to be left standing. Perhaps standing in very good stead if I get it right.
Using this basic template I find extremely useful for dealing with bull trap betting.
It provides a functional and practical framework to be able to benefit from most types of moves. Doesn't pretend to know the future. Is essentially direction agnostic. Can be quantified as profitable with backtesting against both rallies that make a new high and crash events - often with extreme outlier results in crash events.
Whatever happens, and whatever news drives it, this is the plan I'll execute on so long as the market moves in a way relatively similar to my template.
