A misleading signal is known as a “bull trap,” and it refers to a lowering trend in a stock, index, or other security that reverses after a convincing rally and breaches a prior support level. Bull traps can occur when there is a downward trend in a stock, index, or other security.
A bear trap is the inverse of a bull trap and occurs when sellers fail to press a decline below a breakdown level. Bear traps are more common than bull traps.
How Does a Bull Trap Work?
When a trader or investor purchases a security that has broken out above a resistance level, which is a frequent technique based on technical analysis, they have fallen victim to a bull trap. Because traders and investors who buy the breakout find themselves “stuck” in the trade, these situations are called “bull traps.”
Look for higher volume candlesticks after a breakthrough as proof that the price will continue higher. This is a fantastic technique for investors to recognize a bull trap and avoid falling victim to it.
If a bull trap is anticipated, it is best to get out of the trade as soon as possible and cut losses as soon as possible. If a bull trap is detected, it is best to recognize warning indicators ahead of time, such as low volume breakouts.
Bull Trap in The Crypto Market
Bull traps are effective in the cryptocurrency market just as they are in traditional markets. For instance, if the price of an alternative cryptocurrency has been continuously increasing over the course of the past few days, you might feel that this trend will continue.
On the other hand, the opposite may occur, and you find yourself caught in a position where you cannot win. You observe the downward trend, then you wait for a bullish reversal so that you may purchase the dip. You do this because you believe you are getting a good deal when you buy the asset.
What Are Bull Traps Used For?
Bull traps are a strategy that can be employed by day traders as well as long-term investors to take advantage of players in the market who are not paying enough attention.
A bull trap presents day traders with the possibility of making profitable short sales of security as the price of that security rallies back up to meet or exceed its previous high. After then, the price will continue to move in a downward trend, which will result in profits for the trader.
A bull trap presents a potential opportunity for long-term investors to purchase a security at a reduced price as the price of the security comes back down following a rally. They are then in a position to continue holding the security until the subsequent upward trend.
(Bull Trap Pattern Recognition – Tradeciety)
How to Easily Identify a Bull Trap
As we can see, bull traps can be very negative and “deadly” to some investors, especially if you are new to investing. Lastly, it is very important to understand how to identify bull traps and possibly be careful of them, and we have some tips for you.
Lack of an Increase in Volume
When the market is actually breaking out to the upside, there should be a notable rise in volume since more people are purchasing the security as it rallies higher. This should be the case when the market is truly breaking out to the upside.
It is a hint that there is not much interest in the security at that price and that the rise could not be sustainable if there is little or no increase in volume on the breakout.
Lack of a Trend Break
Price movements in stocks do not necessarily reverse themselves whenever there is progress accomplished. As long as the price increase does not surpass the most recent lower high, a downward trend is still valid and has not been broken.
One of the most common errors made by people who get caught in bull traps is failing to confirm the information they have received. They should already have a suspicion that it is either in a downward trend or a range if the most recent high does not surpass the highest point reached in the previous cycle.
This is generally referred to as “no man’s land,” and it is one of the worst areas to start a business unless there is a particularly compelling reason to do so.
Suspiciously Big Candlesticks
During the last phase of the trap, a massive optimistic candle will typically consume the majority of the candlesticks located immediately to the left. In most cases, this represents the bears’ final ditch effort to regain control of the market before the price begins to move in the opposite direction.
Takeaways
- A misleading signal is known as a “bull trap”.
- A bear trap is the inverse of a bull trap and occurs when sellers fail to press a decline below a breakdown level.
- If a bull trap is anticipated, it is best to get out of the trade as soon as possible and cut losses as soon as possible.
- A bull trap presents a potential opportunity for long-term investors to purchase a security at a reduced price as the price of the security comes back down following a rally.
- Price movements in stocks do not necessarily reverse themselves whenever there is progress accomplished.
