Why did one bull trap in Hang Seng Index succeed and the other fail? We discuss what bull traps are and how insisting on price trigger can help traders avoid a trade idea that did not turn out as expected.

This expected bull trap in Hang Seng Index did not work out

We shared this trade idea back in May that Hang Seng Index looked like it was still in a down trend mode and close to doing a bull trap slightly above a resistance. This was what we said:

once price price falls below former resistance at March high, the trap will close and decimation of bulls will be complete.

This trade idea failed later but traders would have avoided because there was no triggger

Traders who shorted HSI based on that expectation lost money because the setup did not turn out as expected. Was the loss avoidable? Were there warning signs?

What are bull traps?

Bull traps are fairly common phenomenon in the market. These are some important things to remember about them:

1. A bull trap is a breakout at a resistance that quickly reverses and reveals itself to be a fake.
2. Therefore bull traps are breakouts that fail.
3. Bull traps can be known by other names such as wash and rinse.
4. The confirmation of a bull trap can be used as a price trigger to go short.
5. Since a bull trap is an expectation that a move above resistance is fake, it has to be confirmed by price returning back below that resistance.
6. Therefore price trigger is a candlestick  pattern that closes below resistance.

This earlier one worked out just fine

This bull trap was a trade signal that led to big correction in HSI

Can bull traps fail?

Since a bull trap is formed when a price breakout fails, can bull traps fail? Yes.

1. A bull trap fails when price does not return below resistance.
2. A price trigger did not present itself.
3. The expected resistance becomes a support instead.
4. Breakout at resistance succeeds.

A bull trap must be confirmed by price returning below resistance

Expected bull trap did not have trigger, price did not close below resistance

1. Those who went short on HSI did so based on expectation that March high will serve as resistance.
2. Price spikes showing great volatility convinced traders that Hang Seng Index faced great resistance. There was great attraction to short early.
3. Price trigger did not show up. March resistance has turned into support instead.

Importance of waiting for price trigger to confirm trade idea

Trading is part forming a trade idea based on price action in the market, part getting the trade done and part applying risk management. Traders can fail for good and bad reasons but a common one that many traders make is not waiting for the final price trigger. Trade signals require many elements to come together but it is essential to wait for the final price trigger.

Tiong Hum Soh

Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.