In the today's article, we will discuss how smart money manipulate the market with a bullish trap.
In simple words, a bullish trap is a FALSE bullish signal created by big players.
With a bullish trap, the smart money aims to:
1️⃣ Increase demand for an asset, encouraging the market participant to buy it.
2️⃣ Make sellers close their positions in a loss.
When a short position is closed, it is automatically BOUGHT by the market.
Take a look at a key horizontal resistance on AUDCHF.
Many times in the past, the market dropped from that.
For sellers, it is a perfect area to short from.
Bullish violation of the underlined zone make sellers close their position in a loss and attracts buyers.
Then the market suddenly starts falling heavily, revealing the presence of smart money.
Both the sellers and the buyers lose their money because of the manipulation.
There are 2 main reasons why the smart money manipulates the markets in a such a way:
1️⃣ - A big player is seeking to close a huge long position
When a long position is closed, it is automatically SOLD to the market.
In order to sell a huge position, smart money needs a counterpart who will buy their position.
Triggering stop losses of sellers and creating a false demand, smart money sell their position partially to the crowd.
2️⃣ - A big player wants to open a huge short position
But why the smart money can't just close their long position or open short without a manipulation?
A big sell order placed by the institutional trader, closing their long position, can have an impact on the price of the asset. If the sell order is large enough, it can push the price downward as sellers outnumber buyers. Smart money are trying to balance the supply and demand on the market, hiding their presence.
It is quite complicated for the newbies and even for experienced traders to recognize a bullish trap.
One of the efficient ways is to apply multiple time frame analysis and price action.
Remember, that most of the time bullish traps occur on key horizontal or vertical resistances.
After you see a breakout, analyze lower time frames.
Quite often, after a breakout, the market starts ranging.
After a breakout of a key daily resistance, gold started to consolidate within a narrow range on an hourly time frame.
Bearish breakout of the support of the range will indicate a strength of the sellers and a highly probable bullish trap.
Remember, that you can not spot all the traps, and occasionally you will be fooled by smart money. However, with experience, you will learn to recognize common bullish traps.