In the famous words of Admiral Ackbar in the timeless classic The Return of the Jedi…

“It’s a trap!”

“Technical Traps” can be a thorn in the side of the active trader, and if you’ve been trading for a while now, you’ve probably been caught in a trap or two.  Bullish or bearish, the technical trap catches us all from time to time and you’re probably wondering how to better avoid them.

In a perfect world there would be some magical formula to help us spot a bull trap or a bear trap before we pull the trigger on a trade, but in reality, as active traders, we will get caught in the occasional technical trap and that’s o.k. they won’t kill as long as we keep our cool and don’t allow our emotions to get the better of us.

For the newbies who are wondering, bull and bear traps are false signals that lead us to believe that a trend is reversing when in fact it has not.  A bear trap gives just enough directional confirmation to prompt traders to place shorts or buy puts only for the confirmation signal to be proven false and on the flip side a bull trap gives just enough directional confirmation to prompt traders to go long or buy calls only for the confirmation signal to again be proven false.

The frequency of false signal traps increases during choppy market conditions and yesterday’s bullish confirmation up off of the 200 period moving average is a good example of a possible bull trap that probably caught a few traders going long just before the bears came roaring back late in Tuesday’s trading session.

Trap Happens… even to the best of us, so don’t fret if you’ve been caught in a technical trap. The important thing to remember is to never allow yourself to stay on the wrong side of the trend by always sticking to your risk management rules.

Here are a few helpful tips to help you better negotiate those pesky traps.

1. Wait for a little more confirmation. A second or even third confirmation candle can help us avoid pulling the trigger prematurely.

2. Position size conservatively and use technically sound stop losses.

3. Scale into trades, start small and add to the position as you get more directional confirmation.

4. Consider using automated trailing stop losses as a way to reduce exposure to risk after being triggered into a trade.

5. Keep working at it until you become a Jedi master.

“Train yourself to let go of everything you fear to lose”

– Yoda

Chart of the Day

It’s a trap!!