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What is a “bull trap” in trading and how to avoid it?
This situation arises when the first signs of continuation of growth or a possible change in the descending price movement of the asset to the upwards appear on the market. The “trick” of the market is that buyers predict the continuation of the trend for the increase in the price, that is, to dominate the “bulls”, while sellers (“bears”) represent real power in the market).
For example, a bull trap can be formed on a downward movement, when the price of an asset rises above the resistance level, after it is breaking upward. In this case, traders can regard that the market indicates a turn and demand from customers. Then the asset begins to buy with the expectation of further movement of prices up, after which the sellers are “stronger”, and the price of the quotation returns to the downward movement.
In addition to a bull trap in trading, they also use the situation with a “bear trap” when the market “deceives” sellers. Many traders of cryptocurrencies fell into such a trap in mid-2020, before the start of the next bull rally 2020-2021.
Why do they use bull trap?
Bull trap is a logical way to create favorable price conditions for sellers: the higher the sale price, the more profit can be obtained by getting rid of the asset.
To create a bull trap in the trade in bitcoin and other cryptocurrencies, large traders acting as “bears” use a weak trend for a price increase. They do not interfere with the formation of conditions for increasing quotations and can even push cryptoactive to prospective price levels for buyers.
Because of this, the illusion of favorable conditions is created to continue the increase in the price of asset and dominance of buyers over sellers in the market. Bull trap is not necessarily a “man -made” process and may appear as a result of a short -term positive market reaction to news or event.
Why get into a bull trap?
Despite the complexity and versatility of the markets, there are several basic causes of the foot of the trap.
Emotions. Emotional market participants are most susceptible to making rash trade decisions. Any minimum growth or rebound of the price is perceived as a turn and a purchase signal, which leads to hasty conclusions and, as a result, losses.
Trading tools. Traiders making decisions based on a small number of factors and indicators do not see a complete picture of what is happening. For example, a sharp increase in the price will be an insufficient signal for purchase if the volume of bidding at the time of price growth is much lower than the previous periods.
Psychology. The traders who convinced themselves of the market turn before it begins, ignore signals or try to come up with non -existent confirmations in order to “fit” the interpretation of their own strategy.
How not to get into a bull trap?
Bull trap can occur in completely different circumstances, but in trading there are ways to reduce the risk of getting into it.
Bull trap is formed above the level of resistance, and you need to wait for its re -testing to observe the market reaction. Successful consolidation of the price over the target mark significantly reduces the likelihood of a trap.
The trader needs to monitor the volume of trading assets. Strong movement of quotes upwards with an increased volume may mean increasing the interest of customers. The increase in prices without increased volumes can signal the weakness of customers and temporary breakfast from sellers, which entails a bull trap.
The tool analysis tools are used as an additional method, in particular Relative Strength Index (RSI), Stochastic Oscillator and Moving Average Convergence Divergence (MACD).