Bull Trap
A bull trap is a false signal that indicates a downtrend in stocks, cryptocurrencies, or other assets that have bounced back and broken the previous support level after a convincing sustained increase in assets.
What is Bull Trap?
Shortly, a bull trap is a false signal that makes sure investors the time is perfectly fine for buying assets and act accordingly in accordance with the downwards of the market. However, investors make a loss because the market continues to decrease from its buy level point in the ongoing process.
However, the successive resistance levels in the prices have lured the investor into a trap. A bull trap is tough to predict and requires detailed analysis.
Learn more about market traps by understanding crypto whale actions.
How to Detect a Bull Trap?
You can easily spot bull traps on the charts. You should first see a price range that has broken upwards. As soon as the stock breaks this resistance point, it falls and comes below the breaking point with volume.
How to Avoid Bull Trap?
There are three tips on how to avoid a bull trap:
Placing a stop-loss order helps protect you from losses. You can protect your assets with this order when there is a bull trap. The only problem here is not being able to predict how high the price can go before the price drops again.
- Trade-In Trend Direction Only
Suppose a breakout occurs and this move is not in the direction of a larger trend. Avoid trading at this point because smart investors can take action at that point to return to the main trend to provide themselves with liquidity.
- Take Action When You See a Retracement
Let’s say you believe that the current price of the asset will break the resistance level and go up. You also don’t want to get caught in a bull trap. In this case, what you’re doing is not trading at the breakout point.
See Also: Bull Market
