The bear trap forex trading strategy is based on pattern called the bear trap pattern. If you don’t know what a bear trap chart pattern is, then in here you will also learn that and see what it tends to look like especially its characteristics.
Lets get started…
What Is A Bear Trap Chart Pattern?
A bear trap chart pattern is a bullish reversal pattern. The best way (in my opinion) to trade bear trap pattern is on support levels.
Here’s what happens during a bear trap situation:
- You will see price breaks a major support level and go down
- the bears (the sellers) think that now the the support level is broken, they start selling
- then suddenly, instead of price continuing to fall further, the bulls (buyers) come in and start buying and drives prices up.
- the bears (the sellers) are now trapped…their trade positions are now becoming negative and eventually their stop losses will be hit as bulls continue to drive prices further up.
Bear Trap Chart Example
This chart below shows and example of a bear trap situation:
- Notice support level is broken and price heads down
- and then suddenly reverses and heads up
Now, there are 3 important things in a bear trap pattern:
- the support level must be obvious
- price must break the support level (the candlesticks can close below it or sometimes break the support level but then close above it, like a bullish pin bar)
- the reversal (this is when you see a bullish reversal candlestick form or the high of the previous candlestick is broken and prices starts heading up from there)
Bear Trap Forex Trading Strategy Rules
- place a pending buy stop order 1-2 pips above the high of the bullish reversal candlestick pattern
- place your stop loss at least 2-5 pips below the low of that bullish reversal candlestick pattern or if that is too close, use the nearest swing low (see stop loss option 2 below on the chart)
- for take profit, you can use previous swing highs or calculate it based on risk:reward of 1:3
Disadvantages of The Bear Trap Forex Trading Strategy
- if you don’t anticipate that a bear trap is going to form, you will not see the buying opportunity coming.
- many new traders may tend to be reluctant to buy when all they see is that price as broken the support level and any bullish reversal patterns after that would tend to get ignored
Advantages of The Bear Trap Forex Trading Strategy
- potential to produce 100 pips plus moves!
- good risk:reward outcome
- stop loss are tight, which can allow you to trade a lot more contracts without risking more of your trading account
- knowing what a bear trap pattern is, will help you make quick decision to liquidate a losing sell trade (if you were trading the breakout of a support level), and then buy.
- the trading rules are really simple to exectute