October 5, 2022

Bull Trap Explained for Beginners

5 min read

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.

ATR RSI
Source: TradingView What is the distinction in between bull traps and bear traps? A bull trap is the reverse of a bear trap: the previous techniques traders into purchasing a possession and opening long positions, whereas the latter catches traders who open brief positions and scares numerous newbie financiers into selling their possessions at a loss. Here are the main differences in between the 2.

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.

example

Source: TradingView How to Avoid Bull Traps? Please note that we can not give you real investment advice. Nevertheless, there are some basic guidelines that every trader can follow to avoid losing their funds to a bull trap.

To start with, never ever disregard doing market research. The more you study patterns and cost action, the simpler it will become for you to determine bull traps and other false patterns on the market.

You can likewise either try to learn how to carry out technical analysis and study various technical indicators or carry out market research by following people and websites that do all this for you, e.g. TradingView.

Numerous traders use stop loss orders when they believe there is a bull trap occurring. This order type can be a great tool for mitigating threat in an unpredictable market.

How Do You Trade a Bull Trap?

Bull trap trading is rather risky, but realistically not extremely avoidable in crypto markets. Many traders that wish to gain from bull traps turn to brief selling– selling obtained properties while the rally is still on and after that buying them back as the trap closes and the rates go down. They run on the belief that the overall downward momentum will continue.

Nevertheless, we would recommend versus utilizing this strategy unless you completely comprehend all the dangers involved (of which there are lots of) and are an experienced trader that has a fully-fleshed out investment technique and comprehends the marketplace well. If you do choose to trade a bull trap, we recommend using stop loss orders.

What Happens After a Bull Trap?

Bull traps end in a continuation of a bear market. The short-term rally they trigger may last anywhere from a couple of hours to a couple of days, and in some cases even longer, however it will still be relatively temporary– and will always be followed by additional decline.


Disclaimer: Please note that the contents of this article are not monetary or investing advice. The information provided in this short article is the author’s opinion only and should not be thought about as using trading or investing suggestions. We do not make any service warranties about the completeness, dependability and accuracy of this information. The cryptocurrency market struggles with high volatility and occasional arbitrary movements. Any financier, trader, or regular crypto users need to research multiple viewpoints and recognize with all regional policies prior to committing to an investment.

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