Horizontal Resistance Bull Trap Forex Trading Strategy
Believe it or not, this strategy will be very different from most strategies that I’m posting. This strategy will be using no indicators. Yup, you heard it right. No indicators. Nil, nada, nothing.
In this strategy we will be making use of supports and resistances and the price action around these areas.
So, let’s begin with this question – what makes the markets move?
Fundamentals, technical analysis, international trade, supply and demand? If you’ve mentioned any one of these, you are right. All of these contribute to making the markets move. However, all of these boils down to greed and fear.
We will be focusing on greed and fear which applies specifically to traders. Although traders are not the only reason why the markets move, but they are a big chunk of market participants. This allows them to have an effect on how the market, prices, and price action behaves.
As with the other reasons, traders also buy and sell out of greed and fear. For example, bulls buy on a trending market out of greed. Inversely, bulls with open positions sell on a falling market out of fear. This behavior often results to bull traps.
What is a bull trap? My definition of a bull trap is when bullish traders, expecting market reversal to the upside, or breakouts from patterns or resistances enter a trade that fails to continue its bullish direction. In a sense, these traders are trapped in a trade that is failing to breakout. As price drops a bit further down, their trades get squeezed tighter and tighter until their stop losses are hit, or they panic and get out of the market.
The sequence of their actions often are prototypical of a trapped trader acting out of fear and greed. They enter the market probably to early, might be before the candle close or some sort of confirmation, in an effort to get in on a breakout earlier than the rest of the market. Greed! Some probably have set their stop losses too tight for them to trade size. Greed! Then they see the market tightening on them and prematurely close their trades, which pushes price further back down. Fear!
This greed and fear, this is what we will make money from.
The Setup: Trading Bull Traps on Horizontal Resistances
Out of all the bull traps, I prefer trading on the horizontal resistances. This is because it is less subjective as compared to diagonal resistances and breakout patterns. You may be seeing a horizontal level at a slightly steeper angle than another trader, or you might have drawn your triangle patterns a bit differently from the rest of the market. This could make your setups less reliable.
So, what is a horizontal resistance. A horizontal resistance is basically a resistance line extended from a high that is either unbroken or was recently tested and price respected. This horizontal resistance line is then extended to the right edge of the chart, where we will be observing how price reacts in that area.
Below is an example of a horizontal resistance coming from a recent high.
Notice the highs. These are the focal points of our resistances, then we just extend it further to the right.
Some traders who prefer supply and demand would draw it in zones, which is also logical. By doing it zones, we would be observing an area instead of just a single line. I think zones are better since the market is too large to be precise. Observing in a zone allows us some wiggle room and a little bit more confirmation.
However, for this strategy the resistance line would be enough.
The Setup: How to Trade the Horizontal Resistance Bull Trap?
Since the horizontal resistance bull trap is a bearish setup, we will only be having a sell setup as an example.
Some supply and demand traders set pending limit entry orders. Our difference from them is that instead of setting pending limit entry orders, we will be waiting for price rejection above the resistance line before we enter our orders. Price rejection of a resistance could mean a candle touching, poking or barely touching the resistance line, then having a long wick above the candle, representing price rejection.
For this strategy however, we will be focusing on candles that poke the resistance line. The longer the wick, the better. This means more bulls are trapped in the trade and might start selling off on the next candle.
Sell Entry:
- Set a horizontal resistance from the most recent high and extend it to the edge of the chart.
- Wait for price to come back to that area and for price to poke above it.
- Wait for a candle close below the resistance line.
- Note: The candle should have a long wick on top relative to its body.
- Note: Knowledge of some bearish candlestick patterns would be helpful.
- Note: Do not trade prior to the close of the candle.
- At the close of the candle set a pending Stop Entry Order at the low of the candle.
Stop Loss: The stop loss should be above the wick of the signal candle.
Take Profit: Take profit target price should be at the low of the body of the candle from where price started moving upwards.
Conclusion
The Horizontal Resistance Bull Trap Strategy is a reversal strategy which makes use of horizontal resistances. Many traders do trade these types of setup with many different styles and strategies. Some use pending limit orders. Some use confirmations going below the resistance area. Some enter a market order at the close. I believe using a pending stop entry order might be a sweet spot. It allows for confirmation of the breakdown and sell off, while not being too late into the party waiting for a candle to close below the resistance area.
Another way to increase the probability of a trade is to look at price action. If prior resistances above price were not broken, and more supports below price are broken, the probability of price going up is lower. There would be just too many obstacles above price than below it. Remember, price is like water, it flows to the direction of least resistance.
You may also tweak the targets, do scaling-outs, or whatnot. Sometimes price would not reach the target take profit. You could be more conservative by having lower targets.
Lastly, this strategy is that of a relatively lower accuracy but higher Risk-Reward Ratio. You may find that many setups fail. But there would be some trades that would allow you to earn more out of a single trade, covering for your losses.
Study it, tweak it, and make it your own.
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