- : January 23, 2021
- : Prashant Shah
Traps: Rising and Falling
Trap patterns in Point & Figure chart are very useful from trading perspective. I have explained that in detail
in my book “Trading the markets the Point & Figure way”.
Trap is a four-column price pattern. Double-bottom sell pattern immediately followed by Double-top buy pattern is known as Bear Trap. Double-top buy pattern immediately followed by Double-bottom sell pattern is known as Bull Trap.
The pattern is applicable on all instruments and timeframes, and it has stood the test of time for me. The probability of trade coming in favour increases when we find a Trap pattern along with some other setup. For example, when you find Trap pattern along with ABC, Tweezer, Multi-column breakout, with some indicator etc.
Length of the pattern
For trading, stop-loss for Bear trap pattern can be placed at double-bottom sell pattern. Length of the pattern decides the stop-loss in that case. We can keep the initial risk in control by limiting the number of boxes in the last column.
If the stop-loss is far we can wait for the follow-through pattern for affordable trade opportunity. If the pattern is deep, it is also a Low pole or 100% pole pattern along with Bear trap.
Improving the result
I have explained in the book that the pattern works well if traded in the direction of the trend. Bear trap in
uptrend and Bull trap in downtrend are very important setups. To keep it objective, let’s define it as:
I recommend 10-column moving average in all instruments and timeframes. Another addition could be:
Bear trap above moving average when average is rising
Let’s call it Rising Bear Trap.
- Bear trap above moving average = Bullish
- Bull trap below moving average = Bearish
Bull trap below moving average when average is falling
Let’s call it Falling Bull trap.
This pattern is very useful and improve the chances. If you backtest, the risk-reward, expectancy and productivity of the setup improves significantly.
You can create the scanner and run this pattern on any timeframe. We need to select three conditions for bullish patterns:
- Bear Trap
- Above moving average
- Rising moving average
Second condition can be eliminated. Average will be rising only when the pattern is above average line. So, the steps to create system in TradePoint are:
You can also add a condition for number of boxes. Select ‘no. of boxes condition’ in the pattern section to
define the initial risk you want to accept.
I hope you will be able to create system for Falling Bull trap.
I have also mentioned variation and divergence of Traps in the book. I will take those concepts further in the next writeup.
- Go to Backtesting -> System builder -> P&F -> Add.
- Select pattern Bear trap
- Go to indicator and select single moving average
- Select condition average rising
- Expression: 1 and 2