Don’t get caught in a Bull Trap
I’m sure some of you have heard or read this word before, but what exactly is a Bull Trap? Read more to find out and learn how to avoid getting yourself trapped in one.
A Bull Trap is another way that the market tries to fool people into the wrong trade. It is also known as a Fake-Out or a Sucker’s Rally, it is a situation when traders buy an asset believing its price will continue increasing, but it ends up declining shortly after the traders have bought in. The market gives a false signal that the downtrend or down-move is over.
When and How do Bull Traps happen?
Bull traps happen in moments of uncertainty, in moments in which false information or rumors are circulating, or when a very sharp down move occurred and some traders think that the bottom has already set in. These buying traders want to be the ahead of the next wave up and are hoping to have bought the bottom.
Examples of Bull Traps in different markets
If you haven’t seen what a bull trap looks like in a real-world trading scenario, don’t worry, we’ve got you covered.
In the first example, we have the Nasdaq 100 with the Bull Trap that happened in February 2022. In the image you can see that price broke above a resistance zone, retraced down towards the resistance zone and bounced off of that zone to turn it into a support zone. Later, however, price broke down through that support zone and continued moving lower.
In the second example we have the Bitcoin bull trap that happened in late March — early April of 2022. In this example you can see that price broke above 2 resistance zones, retraced down to the first resistance zone and bounced from that zone, turning it into support. Unfortunately, price then broke below the support zone and continued moving lower.
What can you do to AVOID Bull Traps?
There are a few steps that you can take to protect yourself from falling victim to a bull trap:
> Don’t enter breakouts that happen on low volume.
> Combine the breakout with bullish candlestick patterns.
> Combine the breakout with other indicators such as oscillators, bullish divergences, moving averages, etc.
> Verify any bullish information that you hear or read that has led to a breakout.
> CONTROL YOUR EMOTIONS. FOMO is the biggest reason that people fall for bull traps, so make sure that you regulate your greed and assess the trade setup with a clear mind.
Overall, traders have to understand that during a downtrend the rallies and up-moves are short-lived. If you do decide to trade these up-moves, make sure to have aggressive take-profit targets or secure your capital with stop-losses. It’s also good to remember that a bear market rarely ends quickly, so you don’t have to be too eager to rush back into the market.
Writer: Danyela Vásquez
EXO VENTURES
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