Facing the Reality
Bear and bull traps are part of Binary Options and there is no guarantee that they will be avoided. Experiencing traps is inevitable when you are trading in the market. These traps occur in every market and on all time frames. Dealing with this situation can be frustrating, whether you're a new trader, seasonal or an experienced one. You may think that the market will be predictable, but there can be a sudden, quick change in the trend that surprises you and makes you feel helpless at the moment. Before you think negatively, try to analyze the situation and make sure you will not let yourself be a victim without doing something.
Understanding Bear and Bull Traps
When you see a false signal that shows you a declining trend in a stock or index which has reversed and is thought to move upwards, but the security actually declines continuously, then you are caught in a bull trap. This trap usually pushes some investors to buy the stock because of a wrong impression and it will turn into a bad investment. On the other hand, if you see a false signal that shows the rising trend of a stock or index has reversed when it has not, then you are in a bear trap. This can prompt traders to be in shorts on the stock or index since they expect the underlying to decrease in value, but instead of declining, the investment stays flat or slightly recovered.
What To Do
It is very important to keep in mind you will likely be caught in one at some point. You just have to accept it and study what options you have to strategize your situation. There are some points to remember regarding the circumstance and all you have to do is learn and apply them.
• Market Monitoring
Traders will want to follow the overall market trend since trading against the trend reduces the chance of success regardless if you are buying into higher highs or buying on value.
• The Reverse Option
If you are trading actively, you can get out of the trade you are currently in and go to the other direction. For example, if you sell a breakout to the downside and the price moves only somewhat lower, you could then go back the other direction. You would exit the put and buy a call.
• Proper Use of Position Sizing
It is unwise to buy a full position at first. Consider buying 50% on the initial purchase and 50% on the second purchase as the stock increases in price. This can decrease early risk and allows you to buy on affirmed strength.
• Observing Traps and Making Use of Them
Observe any potential traps and try to make use of them instead of letting them victimize you. Instead of being frustrated with breakout trading that fails, just simply watch for a bear or bull trap and trade it. If you see a small range develop and the price pops above the range then suddenly goes back down into the range and drops continuously, you can enter a sell or buy a put to take advantage of the situation. If the price couldn't break out of the range higher, it will eventually head down and test the low of the range.
• Experience is a Lead
Conduct a post-trade analysis and use what you learn in every investment you do. Doing this in the long run will help you to become a wiser investor and can help you deal with every trap you encounter.
Always remember not to panic when you bump into these traps. When dealing with binary options, you can't just expect positive results from your investment. Winning as well as losing is part of trading and being angry in a bad circumstance will not give you any solution. The importance of learning about bear and bull traps is be knowledgeable and utilize different options to turn a problem into an advantage strategy. Just make sure to test it and assure its profitability over many trades before using it consistently in your investments.
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INO.com Contributor - Binary Options
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.