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Investors Should Beware Of ‘a Bull Trap’

This data can then be used to estimate the moving averages by evaluating averages of smaller subsets of the data. This method is helpful because it can filter out the random noise in short-run price volatility. This method is helpful to identify the direction of a trend and the extent of resilience. Another version of bull trap chart pattern A bull trap candlestick breaks the resistance and goes higher, but then closes below the resistance level forming a bearish candlestick. Traders witness a downtrend and anticipate a bullish reversal, looking to buy the dip at a good price. After an investor buys in at the initial stage, the price breaks out and rallies beyond the key support zone or resistance level, but later retreats and resumes the downtrend.

what is a bull trap

The price then reverses, going back down causing the him to lose money. Bitcoin currently faces resistance at around $18,200, which is also the 10-day moving average on the daily chart. As Cointelegraph reported yesterday, some traders still anticipate BTC to see another drop in the near term before the rally can continue. Even though it might be tempting to open a short after you notice a bull trap, lower liquidity means higher trading costs and erratic price movements. Waiting for confirmation is always a good idea before placing a trade, whether you’re trading bull traps or not. – Once you identify a bull trap, don’t enter into a sell immediately.

Bearish Engulfing Pattern

When stuck in a bull trap, the primary escape should be to exit the trade at the earliest. The news has a significant impact on how the market feels about a specific items. Traders might check reports for sudden price fluctuation with average volume before taking any trading actions. One may also place a stop-loss order to minimise their losses and hedge their position. When one notices that a bear trap is in effect, he/she can trade it by opening a short position. Financial derivatives such as spread bets and CFDs can be used to go short. These allow investors to speculate on an asset without owning it outright, making them ideal for shorting. A dataset can be taken to track the stock price movements historically.

After several candlesticks ranged on the level, one of them broke out above it and a bullish pattern formed thereafter. Such signals can be further confirmed using other methods such as candlestick formations or indicators. For example, if, after a retest on the zone, a bullish engulfing pattern is formed, it is safe to open the buy trade. In a nutshell, a trader should always wait for the price to not only break a resistance zone but also retest it and gain upper momentum before executing their buy orders.

what is a bull trap

We can’t know, but we know they’re around when the volume increases considerably. A conviction buyer is a catch-all term for well-capitalized individuals and funds who are establishing a long-term position and intend to add more on price declines. In these examples, I have highlighted my trades in penny stocks. While these charts will look crazy to traders of the S&P 100, the principles remain the same. After it was all said and done, I elected to accept the risk.

Tatt Stocks Rise On New Deal With Honeywell Time To Buy?

These sales, combined with short sellers re-establishing their short positions at the higher prices, may send stocks back into their pre-rally downtrend. The false signal will show the asset’s uptrend reversing its direction towards a downtrend. This entices traders to want to quickly close their positions to avoid further loses. Some would quickly open short positions in hope that they would make profit from the decline in value, when in fact the trend suddenly reverses again and continues to incline. Normally, we might expect this breakout to result in a series of higher highs as the level of resistance has been breached.

what is a bull trap

If the price just tests the support and keeps growing, it’s not a classic bull trap in trading. A bull trap is a real pain in the neck as it causes substantial financial losses leaving the market participants penniless. The bull traps occur when prices start heading upwards, but then, out of nowhere, reverse and decline. This counter price move produces a trap and often leads to substantial sell-offs. A bull trap occurs when an asset quickly rises in price before falling again. Bull traps mislead traders into believing that an asset will continue performing well. Traders and investors who buy during the breakout are trapped in the trade. Traders and investors can search for certain indicators that the price will continue to move higher in an effort to avoid a bull trap.

This makes any traders watching the price behavior to believe that the bull rally is proceeding, so they execute buy traders. It is also possible that when the price crosses the resistance levels, investors who are already holding long positions may decide to cash out and close their positions. That’s because they are happy with the gains they already made. This increases the supply of the asset and creates selling pressure in the market. There are several ways a bull trap can occur, but they revolve around a false breakout. what is a bull trap If you’ve been trading for some time now, no doubt you would have encountered a bear trap or perhaps even fallen victim to it. Let’s say the price starts to climb unhindered but is unable to climb past that resistance over several trading sessions. Of course, the breakout may be legit in some cases, but it’s usually better to wait and confirm the trend before opening a position. While not always a 100% sure sign, a market testing resistance levels multiple times and failing to break out indicates weak bullish pressure.

The Bull Trap Pattern: How To Profit From trapped Traders

A bull trap is the opposite of a “bear trap” which can fool traders into selling out too soon in the middle of a bull market. A bull trap is not just a pattern, but it helps explain how the average trader approaches the markets and why the professionals usually win. When liquidity erodes at these levels, market price declines back and is within the resistance zone. We represented the difference of a bull trap and a dead cat bounce in the below image.

This pattern is completed when the price breaks down and creates lower lows, pushing the trader into a losing position. Hence, these breakouts can be considered a false signal, one of the worst-case scenarios a trader can anticipate. Bull and Bear Traps serve as an early warning system for chartists that a signal is failing. However, traps are not perfect signals and may instead evolve into catapults. When looking at a bull trap, look at the size of the congestion zone and identify support.

  • This represented a loss of over 20% and a ~30% swing down from the previous days’ closing price.
  • There is always someone else on the other side of your trade and, thus, you should think twice who is buying from you and why do they want your trade.
  • The best way to escape a bull trap is set a stop-loss on your position as you open it.
  • But such breakouts may actually be false signals, and the price soon resumes a downward path.
  • Investing in cryptocurrencies is speculative and investors should carefully conduct all research and diligence before making trades.
  • The signal will be stronger if the bearish engulfing pattern follows the Doji candlestick that signals buyers’ uncertainty.

You can go long after the second retest and a formation of the strong bullish candlestick. All traders should act on warning signs as soon as they experience such signals. Traders should look for higher than average momentum when following a breakout. After Build up with few red doji , i got a bullish candle closes previous high.

A pullback that holds above support could be just that, a pullback. When looking at a bear trap, be sure to identify congestion zone resistance. A bounce back into this resistance zone could simply be an oversold bounce. Chartists should employ other aspects of technical analysis to confirm signals on P&F charts.

How Do You Identify A Bull Trap?

By introducing a debt component, both short-term and long-term, one can secure a natural hedge against any economic instability. This can also protect investors if their sectoral exposure is higher on financial services in certain situations. It is not easy to pinpoint when the markets will turn bearish. In the short-term, adverse news around Covid-19 and lockdowns may influence sentiment negatively causing markets to correct to a certain extent. To prevent capital erosion, one must tread carefully with adequate hedges in place to cover for the uncertainty. It’s important to set a strict loss allowance by closing a position if a trade goes the wrong way. 1-2% loss of your starting capital can be a good starting point. In this post, you’ll learn how to spot and think through these traps in order to become a better and more profitable cryptocurrency trader.

When a bullish pattern presents itself, it becomes a buy signal to long traders. As the price rallies, trapped short traders face huge losses on their position. Most are forced out of their long trades, which means they have to buy, which accelerates the rally. In fact, a bull trap can occur everywhere, but a dead cat bounce always happens during a downtrend. Another name of the Dead cat bounce is sucker rally, and it refers to naive investors or buyers who think the bear market is over. Instead of opening a long position near a resistance zone, you should wait till price pass that resistance and then put your buy order after it retraced to a proper support level. Moreover, you can ladder your position to mitigate your risk. e.g., you can buy 50% before resistance level and buy the remaining 50% after the breakout to decrease your losses. This bull trap pattern is so tricky, although the first candle closed above the resistance line, but the next candle got rejected by bears and price dropped sharply after that.

Celebrating Freedom, Justice, & Trading For All

If the trade doesn’t work out, a stop loss order will prevent a small loss from turning into a severe one. Also, the market was exhibiting range contraction , which is the opposite of a healthy rally. Lastly, RSI could not break above 50 , suggesting this rally could be a false recovery. At this point, there is no evidence to suggest a meaningful low is in place for Bitcoin.

This will give you some indication of how far the stock can go against you. Remember, you have likely enjoyed a positive position in the stock for some time. In the BitOrb exchange, traders can place orders based on the RSI indicators. You can create conditional orders using the Orchestrator for when you feel RSI becomes oversold and automatically open long positions.

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