Stock Trading - Failed Signals

By: Chris Jones
Failed signals may be the most reliable signals of all. Have you ever bought a stock, knowing that it was going to be a very profitable trade? I mean, it had to be the perfect trade. It looked as if it came right out of the text book. You know, the perfect set up, the perfect formation, everything is lined up perfectly. You just can't miss with this one. But, shortly after you bought it, the bottom fell out. Well, you stepped right into a Bull Trap.

What is a Bull Trap?

After a technical buy signal occurs, price tends to jump because so many people are watching the same thing you are, waiting for that buy signal to trigger their purchase of the stock. Occasionally, price will move up enough to draw people in, but not enough to continue the advance.

Price drops back down triggering the stops that were placed just below the last swing low, further accelerating the downward spiral, so all of those people that were bullish stepped right into a trap. Once the selloff reaches this point, others with long positions sell when they see this move has momentum, continuing the descent. But, that's not the only type of failed signal. There is also the Bear Trap.

What is a Bear Trap?

Well, I think you have already figured this one out. Yes, a Bear Trap is just the opposite of a Bull Trap. Instead of the trap catching people who have taken a long position, this time it traps people who have taken short positions. Many people will short a stock when a sell signal is triggered, but when the stock turns bullish those traders have to cover their positions, fueling the bullish bias.

Trading a Failed Signal

Usually, when traders find themselves on the wrong side of a trade, they just want to get out of that trade and move on to the next one, hoping they will trade on the winning side next time. But, if we are smart, we will cut our losses and change our position to the other side of the trade. Why try to find another trade, when a failed signal is a legitimate signal itself. Failed signals are probably the most reliable of all, and sometimes they just may be our best choice for winning trades.

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