There are couple of things that are scarier to both novice and knowledgeable traders alike than losing cash rapidly. The markets are often treacherous, and numerous financiers have actually been unfortunate enough to learn simply how callous trading can be.
What Is a Bull Trap?
Bull traps are technical signals that show an incorrect trend reversal. A bull trap occurs when the price of a possession on the Forex, crypto, or stock market unexpectedly surges up after a prolonged decrease just to continue falling quickly later on.
A bull trap can also be called a “dead feline bounce”.
How Does a Bull Trap work?
Typically, bull traps occur in the middle of bearish market and develop a false signal that can fool investors into believing that the price of an asset they’re trading has actually begun to recover.
When a bear market is happening, financiers typically search for purchasing chances while anticipating a price recovery to offload their possessions and earn a profit. When the price of a property relatively recovers and shoots up, numerous see it as
a chance to make a fast buck. Usually throughout bull traps the rate of a possession rallies beyond essential resistance levels as more traders go into the marketplace in anticipation of a mooning. Nevertheless, because it’s just a bull trap and not a real rally, not too long after it rises, the cost falls again. As the bull trap exposes itself and the rate begins to decline, lots of investors begin to stress and offer their possessions en masse to attempt and lessen their losses, pressing the rate even lower.
The traders that bought assets in the short period when the price action was bullish end up getting caught in a bull trap.
How to Identify a Bull Trap
Bull traps are rather typical in all markets and Forex trading, but they regrettably happen especially frequently in the crypto market. Finding out to identify them is crucial to reducing the threat of losing your funds while trading.
While the very best method to identify a bull trap involves carrying out technical analysis and reading charts, there is a simpler method to do it, too. Sometimes you do not need actual market data to see that the rally is a trap: it can be enough to simply observe the community. If nobody is fired up about a rally and people are primarily trying to find chances to offer, and especially if there was no news that could influence strong relocations and bullish cost movements, then you are likely dealing with a bull trap.
Trading volume is displayed in practically all trading terminals, and is a terrific indicator of whether a rally is authentic or not. The basic guideline is that if there are strong relocations in the market however the trading volume hasn’t altered, then it’s most likely to be a trap.
The technical indications that can assist you to recognize a bull trap are “Average True Range” and the RSI (Relative Strength Index). If the previous is decreasing throughout bullish rate action and the latter can not break through the 50 centerline reading, then the price rally is most likely to be a bull trap. Here’s an example of what these two indicators appear like. The majority of trading terminals clearly display the 50 reading for the RSI.
|Bull Trap||Bear Trap|
|Signals a false upward trend||Signals a false downward pattern|
|Techniques bullish investors||Traps brief sellers and “weak hands”|
Bull Trap Example
There are many examples of bull traps in the crypto market– after all, they unfortunately occur rather typically.
Here’s an example from May 2021. It was a bearish market, and BTC was in decline after an extremely long and successful rally. On May 16th, there was a short price recovery, with Bitcoin going from 46K USD to 49K. Nevertheless, as you can see on the chart, the ATR– the red line– did not go up at that moment, and the RSI– the purple line– remained strongly below 50. It was a bull trap, and the cost of BTC continued to decrease not long after.