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What is a bull trap, and how to identify it?

The bearish investor or trader expects a break downward through a resistance level to be followed by further downward movement. Thus, they are “trapped” and lose money after the reversal in price back upward. It occurs when a selling market suddenly shows a bullish move, resulting in a rising market price, which is usually short-lived. The rise in price lures many buyers into the market, but before they can make a significant profit, the price reverses and continues as a downtrend. A dead cat bounce is a general term for any upward price movement that occurs during a strong downtrend. A bull trap usually has technical elements involved, such as the price moving above a prior resistance level. A dead cat bounce may exhibit similar characteristics to a bull trap. To identify a bull trap, traders could watch for a bearish candlestick chart pattern​ just above the resistance area. A bearish candlestick pattern could indicate that buying momentum has slowed, and selling pressure is coming in. For example, the ‘shooting star’ candlestick pattern helped set the stage for the price decline on the EUR/USD chart.

The price reverses, causing the bullish investor to experience a price decline. The move “traps” traders or investors that acted on the buy signal and generates losses on resulting long positions. Although some traders may be disappointed by this, most are better off waiting for confirmation and buying at a higher price than attempting to”get in early” and be trapped. When a stock has established itself as a strong uptrend with little bearish pressure, it implies that buyers are flooding in all of their resources. However, when they reach a resistance level they’re unwilling or afraid to breach, the price will typically reverse before going even higher. Suspiciously huge bullish candlestick In the last stage of the trap, a huge bullish candle usually takes up most of the immediate candlesticks to the left. Since bull traps occur when bull traders fail to supply the upward trend of an asset following a resistance breakout, low trading volumes during breakouts are good indicators for such. A bull or bear trap is typified by a 1 to 4 bear pattern,which is defined by the false break of a key market level-In this case a support or resistance level. These false breaks are triggered after huge trend moves and as a market approaches a a key market level.

Dont Get Snared: How to Avoid Bull Traps

Also referred to as”dead cat bounce,” bull traps are often seen in crypto due to speedy recoveries. In crypto, bull traps work as they do in any other market.” Kotsay was ejected by home plate umpire Chris Segal in the bottom of the sixth inning. For instance, if the price of an altcoin has been rising steadily over the past few days, you may believe it will continue to rise. Traders who trade predominantly on technical levels will have a harder time to avoid bull traps than traders who also combine fundamentals in their analysis.

  • You know sometimes you enter a trade, feeling so confident that you are going to make a killing,only for the market to do a major 360 reversal against you.
  • With that in mind, they will be less concerned about daily price movement.
  • To manage risk when trading in a bull trap, you may consider the use of stop-loss orders​.
  • This procedure guarantees the safety of your funds and identity.
  • To effectively avoid the negative impact that bear and bull traps can have on your trading balance, we recommend that you use a combination of the methods described above.

Even if the asset price increases it doesn’t mean a change in the current trend. As long as the price increase is lower than the previous one, we deal with the bearish movement, like here, for example. If everyone around you is talking about how the market is about to make a big move higher, be extra careful. Bull traps often occur when there is a lot of excitement in the market, so it’s important to stay level-headed and don’t let emotions get in the way of your trading. – Sudden spikes and upside breakouts are usually accompanied by strong bearish divergences between the price and an oscillator, such as the RSI.

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He has been published on well-known personal finance sites like Bankrate, Credit Karma, MoneyCrashers, DollarSprout, and more. TJ has a bachelor’s in business administration from Northeastern University. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. Stay on top of upcoming market-moving events with our customisable economic calendar. You are now leaving the TD Ameritrade Web site and will enter an unaffiliated third-party website to access its products and its posted services. The third-party site is governed by its posted privacy policy and terms of use, and the third-party is solely responsible for the content and offerings on its website. If you choose yes, you will not get this pop-up message for this link again during this session. A stop order will not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.

Try to stay up to date on those key fundamentals to determine whether an upside breakout could turn into a bull trap. Low volume usually occurs during times of low liquidity, meaning that there are probably not enough sellers to absorb the breakout until liquidity picks up again. Bull traps can be very frustrating as they seemingly provide attractive buying signals, only for the price to immediately and abruptly reverse in the opposite direction. An unprecedented crisis of confidence has affected the crypto industry for several months. The fall of the two digital currencies was caused by the fact that many investors wanted to liquidate their positions at the same time. As a result, the stock’s buyers soon outnumber its sellers, a situation that causes its price to go into a tailspin. Day trading can certainly be lucrative, but the field is full of traps that can cause you to lose money.

These patterns form with a Triple Bottom Breakdown, a bounce back into the pattern and then Double Bottom Breakdown. Technically, a one-box Triple Bottom Breakdown and a bounce back into the pattern qualify as a bear trap. Chartists should be careful because the Triple Bottom is a congestion area that represents a resistance zone. While the bounce back into the pattern shows resilience, it takes a Double Top Breakout to produce a bullish P&F signal to fully counter the original Triple Bottom Breakdown. A Multiple Top Breakout includes a Triple Top Breakout, a Quadruple Top Breakout and anything wider. A Triple Top Breakout occurs when two successive X-Columns form equal highs and the next X-Column breaks above these highs. A Quadruple Top Breakout is similar to a Triple Top Breakout, but with three successive X-columns forming equal highs instead of two. For a Bull Trap to be possible, this breakout can only be one-box. Breakouts that move two or more boxes above resistance do not qualify.
what is a bull trap in trading
Investors who fall for the trap wind up buying an asset that continues to lose value. It’s hard to identify a bull trap because normally after a breakout, an asset would be likely to increase in price, not reverse. However, what you can do is carry out technical analysis and fundamental analysis on the asset you want to trade. When a bull trap is suspected, traders should exit the trade immediately or enter into a short position. Stop-loss orders can come in handy in these scenarios, especially if the market is moving swiftly, to avoid being swept away by emotions. It is a pattern that makes it seem like financial assets are on their road to recovery after a certain downtrend. The reality is that asset or stock values are bound to decline even more.

How to Avoid Bull Traps

That said; a trader can avoid bull traps by steering clear of late entries. If a trend has been running for a period deemed as “too long”, then it is best not to trade it. That said, if after breaking past the resistance level, the price tests it again but fails to gain upper momentum, then another classic bull trap pattern is created. Even the crash of March 2020 saw wild rallies to the upside. The point is, bullish or bearish short-term price action doesn’t occur in a vacuum.

What is a bull flag pattern?

Bullish flag formations are found in stocks with strong uptrends and are considered good continuation patterns. They are called bull flags because the pattern resembles a flag on a pole. The pole is the result of a vertical rise in a stock and the flag results from a period of consolidation.

There is currently 13,089,105 ETH staked according to the Beacon Chain explorer. At current prices, this is worth around $18.3 billion and represents almost 11% of the total circulating supply. 32 is the number of tokens required to run a validator node, but with so many exchanges offering staking services, investors can stake with fewer than this. Through this, you avoid letting your emotions dictate how you trade. Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions. Comments that contain abusive, vulgar, offensive, threatening or harassing language, or personal attacks of any kind will be deleted. Stay tuned for further updates, crypto guides, and market insights from LetsExchange. You can also follow us on Twitter, Facebook, Reddit, Instagram, LinkedIn, Medium, Quora, Telegram, Steemit, and Bitcointalk for first-hand information from our team. False news – information about listing on major exchanges, integration with a major service, etc. influences the token price positively by pushing it up. But if the information is false, the price surge will be followed by a sudden and abrupt drop.

Ethereum Merge Hopium or Bull Trap; ETH Prices Up 20% in a Week

Price is slightly in favor of ‘trapped’ traders, providing them confidence and security. A good stop location will be when high breaks out, which indicates the Failure of a bull trap. However, with commodity prices soaring in several categories, investors have an opportunity in agriculture technology stocks. These companies run the gamut from companies that provide equipment to those that provide fertilizer, pesticides, and other products and services. If investors see a stock trading below its fair value, they may rush to purchase shares at what they perceive to be a discount. But as every investor knows, the price movement on a stock is not always rational, and that’s why investors need to take steps to confirm that the price movement is real. People in disbelieve hold on to their trades that are suddenly turning into a loss. 3) Price goes a little in the favor of those ‘trapped’ traders, creating a feeling of confidence and security.

The Definition of a Bull in Finance with Examples –

The Definition of a Bull in Finance with Examples.

Posted: Tue, 24 May 2022 07:00:00 GMT [source]

These traps are cryptocurrency market manipulations by traders who own large amounts of cryptocurrency. Becoming trapped in a bull trap can be a frustrating experience so it is important to recognise the warning signs before investing – now, this is easier said than done. A trader may potentially seek a higher than normal volume and bullish candlesticks on their graph before an outbreak. Here is what you can look out for to identify and avoid one. Checking out public opinion and news is another good way of identifying a bear trap. Sustained good volume over several candles is one thing, but a sudden spike in volume out of nowhere is quite another. The July 3–4 bull trap that took Bitcoin from $33,600 to $36,000 (then back down to $33,300 in 15 hours) started with a massive $1,000 green candle. It’s harder to understand when to trade with multiple indicators.

Look at this example of a Bull Trap pattern right at a resistance level. And that’s exactly where the bull traders tend to get caught. A long sell-off where traders miss profit opportunities and become greedy in search of more profits. Receive a free world-class investing education from MarketBeat. Learn about financial terms, types of investments, trading strategies and more. View our full suite of financial calendars and market data tables, all for free. To help investors determine if this opportunity is right for them, we’ve created this special presentation.

This rejection shows that although the buyers tried to push the price higher, the sellers rushed in and overcame them, resulting in the long wick. The resulting imbalance of escaping buyers and the aggressive sellers causes the trend to tilt in favor of the sellers. As the trend sinks lower, it takes out the stop losses of the new buyers, making the sellers even stronger. Once the bull trap is released, the price usually resumes its downtrend. Because there was little to be bullish about in the first place, more experienced traders may take the elevated price as an opportunity to sell. Psychology also comes into play when those buyers realise there are no other buyers coming in after them. Read more about what is an order book crypto here. As selling begins, the traders who just bought may panic and sell, further driving the price down. The Balance does not provide tax, investment, or financial services and advice. Investing involves risk including the possible loss of principal. At the end of the day, it may be wise to avoid trying to time the market and instead buy into long-term investments or invest in more diversified securities, like mutual funds.

However, by understanding how bull traps form and what they mean, they can become profitable setups. In this post, we have seen how bull traps can be identified and even traded while minimizing the risks and maximizing the gains. ● If the trader took this trade, his stop loss would be placed above the resistance zone. ● They would wait until the price touched the resistance zone. After several candlesticks ranged on the level, one of them broke out above it and a bullish pattern formed thereafter. All the same, it is riskier to take buy trades at resistance level than buying at support zones.
To effectively avoid the negative impact that bear and bull traps can have on your trading balance, we recommend using a combination of the methods described above. The impatient traders would have jumped into the trade as soon as the trend line was broken, and thus, they would have been entrapped. It is possible to trade in bull traps and one of the most successful methods to do so is after a trend change downwards occurs. It’s called a bull trap because a trader who buys assets believing that prices will increase is called a bull, while someone who tends to believe that prices will drop is called a bear. Bullish traders may use stop-loss orders, which close a losing trade at a set level, managing downside risk or hedge portfolios with put orders. Bullish investors often use dollar-cost-averaging strategies with a lengthy time horizon and cross-asset diversification. When traders’ interest in a coin is growing, the trading volume of this coin is growing, too, because traders start buying and selling it. A bull trap is a situation when a trader buys an asset whose price suddenly started growing in the hope to get a profit.
what is a bull trap in trading