Worrying about market traps? Here are some ways to deal with them.
It’s a trap!
Hi ,
No trap here, but in the markets, often.
I recently wrote about market pigs getting slaughtered. Bulls and bears have their traps to watch out for, or they might end up with the pigs.
Let’s see the best ways to prevent that.
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The traps tend to happen at the extremes of a trend or market cycle.
A bull trap is when the market sentiment has turned bullish, so everyone starts investing, only to watch the market start falling further after a short rise, leaving investors with losing long positions.
A bear trap is when the market sentiment has turned bearish, so everyone is pulling out and even shorting, only to watch the market keep growing after a short dip. In this case, investors miss out on further gains but the greatest danger is for the short positions of course.
These traps can be very hard to spot.
As with everything else in the market, there is no guarantee.
Sometimes the hype turns out to just be a trap, other times no trap materializes, and entering positions early would have been preferable.
Keep in mind that your trading window is very important. Maybe a trap is just an irrelevant blip for you because your trading window is way larger than the trap’s timespan. Or the trap movement is just the opportunity for a quick trade you were waiting for.
There are no absolute ways to deal with traps, it all comes down to your personal strategy, but it is necessary to know about them so we don’t get fooled.
Personally I use Elliott Wave Analysis to inform me about what movements are reasonable to expect, coupled with general fundamentals and recent events related to the asset I am trading.
I wish that was enough.
I find it is more important to have good execution skills, so I recommend you practice that.
Quite often I am wrong at the start and end of movements so I’ll be changing my mind a lot until I have confirmation. Then I double down.
This is actually why I never offer recommendations. I could tell about a trade, only to change my mind later and I would have to send out regular updates which would become too distracting.
Work on having good emotional control and execution coupled with your strategy.
Imagine being at the start of a trap, and imagine all media hyping the trap direction, how hard it is not to fall for it.
In my beginner’s course, I recommend always waiting for confirmation. Better being a bit late than too early.
For more advanced dealing with the traps, either rely on the updated fundamental, or technical analysis, or both.
Fundamentals will tell you where the price is likely to go with time once the market irrationality passes. Technicals will show you warning signs so that you know if you should be careful in the shorter term.
Ultimately, if you stick to your investing routine through the years, you will also develop your own instincts and avoid the traps, like a seasoned market animal.
If all else fails, when family and friends who know nothing about investing start getting excited about active investing, it’s time to thread carefully.
https://www.youtube.com/watch?v=wk-6DPrcMv4
Have a good one,
Chris
Thank you for reading! :)
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