The most common psychological traps for losing money in trading:
➡️ Treat 'rebound' as 'reversal' to catch the bottom
➡️ Or clearly having profits on a short position but due to fear of missing out on a rebound, reverse to go long, ending up trapped.
🔎 1. Fundamental reasons: Why is it hard to distinguish?
1. Human nature drives:
Price falls → Instinctively feel 'it has fallen too much and will rise'.
Price rises → Instinctively feel 'it has risen too much and will fall'.
→ This impulse against human nature makes us always want to catch the so-called 'bottom' and 'top'.
2. Confusing understanding of rebounds vs reversals:
Rebound: a correction in a downtrend, usually limited in space and short in duration.
Reversal: the trend truly turns around, a new direction is established, accompanied by changes in volume-price structure and sentiment.
If you can't distinguish clearly, it’s easy to misinterpret a rebound as a reversal and go all in.
3. The methods of institutions:
Institutions are well aware of human nature, often using rebounds to wash out shorts and counter-attack longs.
Typical patterns:
Sudden rise in a downtrend → Retail investors think it’s a reversal and enter → Institutions sell off to continue the drop.
📊 2. How to distinguish between rebounds vs reversals?
Here are a few 'iron rules':
🔹 Characteristics of a rebound:
Volume shrinks: small bullish candlestick after a drop, trading volume does not keep up.
Moving average resistance: price rebounds to the 5/10/20 day moving average and is pushed down.
Low position: has not broken previous key resistance, just repairing oversold conditions.
👉 In this situation, do not easily go long; it can only be seen as a 'breath' in the downtrend.
🔹 Characteristics of a reversal:
Volume at the bottom: accompanied by significant trading volume, clear market turnover.
Key level breakthrough and stabilization: break important resistance + pullback does not break.
Volume-price coordination: price sets new highs, while volume follows and increases.
👉 This is the signal for a true trend reversal.
🎯 3. How do institutions usually set up traps?
In a downtrend:
Use a small sharp rise (rebound) to attract bottom-fishing orders, wait for retail investors to follow, then institutions sell off to continue the drop.
The more it creates the illusion of a 'reversal', the easier it is to harvest retail investors.
At a real reversal:
Institutions will not push the price up all at once, but rather break out - wash out - confirm - then rise again.
Provide 'pullback confirmation' signals to let funds gradually enter.
✅ 4. How to restrain yourself?
Here are a few executable disciplines:
1. Trend is king; do not go against the trend:
Never easily go long in a downtrend.
Only consider confirmed reversal signals (increased volume breakout + pullback confirmation).
2. Treat rebounds as signals to reduce/increase positions, not as reversals:
Hold a short position → A rebound is an opportunity to add to shorts.
No short position → Do not chase long on a rebound.
3. Establish a self-check checklist:
Before each entry, ask yourself:
Is it a rebound or a reversal now?
Has the trading volume increased?
Has it broken through key resistance?
If none of the three exist → Do not go long.
🧭 Summary mnemonic:
No volume in rebounds, do not go long; do not catch the bottom if the trend hasn't changed.
Reversals must have volume and price, confirm the pullback before entering.
Follow the trend primarily, counter-trend secondarily, and always go light on counter-trend.