What Are Cryptocurrency Bear Traps and Bull Traps? How Do I Avoid Them?
A bull trap usually has technical elements involved, such as the price moving above a prior resistance level. A dead cat bounce may exhibit similar characteristics to a bull trap. The price of the asset may experience a short-term decline, dropping below a support level, enticing people to sell existing long positions or take short positions. If there are not enough sellers to keep the downward momentum going, buyers may step in and drive the price higher. To identify a bull trap, traders could watch for a bearish candlestick chart pattern just above the resistance area. A bearish candlestick pattern could indicate that buying momentum has slowed, and selling pressure is coming in. For example, the ‘shooting star’ candlestick pattern helped set the stage for the price decline on the EUR/USD chart. A bull trap fools some traders into thinking a market or an individual stock price is done falling and that it’s a good time to buy.
Secondly, ETHUSD couldn’t even break a horizontal resistance line . At this point, there is no evidence to suggest a meaningful low is in place for Bitcoin. For example, if the RSI has a hard time moving above the 50 centerline reading, this is indicative that a market shows indecision and is not yet recovering. Without momentum in the market, RSI readings will remain below 50. This behavior suggests the mood of the market is still to the downside, and the door is open to a bull trap. However, the problem escalates for the buyer, whose trade begins to float at a small loss. The problem intensifies for the buyer as the market pricing keeps readjusting to lower levels.
The stock never breached its previous high, so it’s still technically range-bound. The timid rally failed firmly within the support zone established in October. The bears were very interested in selling during the decline, causing huge volume spikes. The bulls are comparatively uninterested and are not aggressively buying shares. You want to see if price breaks that level and remain above that resistance level. Firstly, you can look for signs of confirmation such as higher trading volume, bullish candlestick patterns, and a low or neutral RSI, as mentioned above. Volume is another important indicator to look out for in both bull and bear traps. In such cases, the initial downtrend is not indicative of continuing price decreases as it is a temporary dip caused by profit-taking and institutional manipulations. Instead, the price will increase again once the institutions scoop the available assets. Thus, a high RSI can also be indicative of a potential bear trap.
Low Trading Volume? That May Be a Trap
Once the asset’s price has decreased, the institutions and other experienced traders and investors jump back into the market to buy the asset at a discount. This causes the asset’s prices to rise due to an increase in demand. You can trade a bull trap by opening a short position when you identify that a bear trap is in effect. These enable you to take a position on an asset without having to directly own it, making them well-suited to shorting. It’s hard to identify a bull trap because normally after a breakout, an asset would be likely to increase in price, not reverse. However, what you can do is carry out technical analysis and fundamental analysis on the asset you want to trade. Bull traps often happen around previous highs where it looks as if the price is continuing the rally. Especially amateur traders often tend to enter too early around such key levels . It’s especially dangerous if price rallies for a bit in their favor ad the trapped traders feel too comfortable and too attached to their trade.
During the initial downtrend, prices will remain below the sloping resistance trend line. A bull trap is when a steadily declining asset appears to reverse in a convincing rally but soon resumes its downward trend to even lower pricing. Bitcoin is currently forming another rising wedge, as it did with the previous level of consolidation. The level we are at is much riskier than the one we dropped from previously… The Balance does not provide tax, investment, or financial services and advice. Investing involves risk including the possible loss of principal. Bull traps occur for many reasons and it can often be hard to pinpoint just one reason why a bull trap occurs. Below, we’ll cover everything you need to know about bull traps. One of the tell-tale signs of a bull trap is when a stock has experienced a sharp downtrend or gap-down with giant red candles, but its uptick is tame. When I am watching a currency pair and I see such a situation, I then look for trading setups where I can sell including bull trap trading setup.
Most traders are likely better off waiting for confirmation and buying at higher prices than trying to “get in early,” only to get trapped. You’ll typically witness a bull trap shortly after a stock has a poor earnings report or scandal. Bulls for that stock will interpret this as a great buying opportunity but are typically blind to the weak technicals. The key here is the perception of a trend reversal, just enough to lure in the “buy the dip” crowd. When the price begins declining again, these bulls are forced to sell out of their positions, adding more fuel to the fire. If you are caught in a bull trap in forex trading, then it is a very unfortunate trading situation to be in.
What is a bull trap? ++ Trading Definition & Explanation
Big players are intentionally pushing the price higher to entice unsuspicious buyers. As of the 6th of January 2021, cryptocurrency instruments are not available to retail clients in the UK. Trading is subject to high volatility caused by unexpected events like political events or natural disasters that may lead to rearrangements of market forces. Libertex MetaTrader 5 trading platform The latest version of MetaTrader. Research & market reviews new Get trading insights from our analytical reports and premium market reviews. A stop order will not guarantee an execution at or near the activation price.
- Whether you are a day trader, a scalper, or a swing trader, you’ll see those bull traps appearing over and over again.
- Trading volume should be higher than average to indicate momentum and mounting pressure for either a strong uptrend or market swings and reversals.
- When a position turns out to be a losing trade, some traders can make emotional trading decisions that move prices sharply.
- The Bull Trap pattern requires you to go short against strong momentum.
- I explain all trap and squeeze patterns in our strategy course.
A bull is an investor who invests in a security expecting the price will rise. Discover what bullish investors look for in stocks and other assets. Bull traps occur when buyers fail to support a rally above a breakout level. Keep price action in mind as you look to take your profits. The bull trap candlestick must be bullish…it will be green candlestick in other words. Breakout of the low of this bull trap candlestick see price heading down. With the economy still in lockdown and the news on coronavirus still concerning, it got us thinking – can the worst really be over? That led us to research some previous market crashes, and introduced us to the idea of a ‘bull trap’. Popular crypto analyst and trader ‘Bluntz’ observed that ETH has reclaimed the 200-week moving average which could signal a bottom.
You have a logical place to set your stop loss (below the low of the build-up), and this offers a more favorable risk to reward. This means the price can easily reverse in the opposite direction (until it finds the nearest “floor”). Because when the price has exploded higher, there’s no “floor” to hold these higher prices. The market does a 180-degree reversal and BOOM, you got stopped out — now you’re sitting in a sea of red. Rayner Teo is an independent trader, ex-prop trader, and founder of TradingwithRayner. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Bearish Bets: 3 Stocks You Should Think About Shorting This Week
Bull traps are just one of many ways the markets can fake out investors and traders, and the reasons why they happen to have a lot to do with what’s going on inside our heads. Now, it’s time to trade the Bull Trap pattern and profit from “trapped” traders. James Chen, CMT is an expert trader, investment adviser, and global market strategist. After a very ugly open on Thursday morning, the dip-buyers made a good attempt, and managed to push the S&P 500 close to even before another bout of selling hit in the afternoon.
When you think that you found a bull trap, it will eventually turn out to be a true breakout to the upside. So, to find a strong resistance level you should switch to the weekly or the daily timeframes and look at the charts. Is there a peak that actually stands out from the trading channel? If there is a peak, this is your resistance level (don’t be too lazy to do this to confirm your resistance levels). A bull trap occurs when a trader or investor buys a security that breaks out above a resistance level—a common technical analysis-based strategy. While many breakouts are followed by strong moves higher, the security may quickly reverse direction. These are known as “bull traps” because traders and investors who bought the breakout are “trapped” in the trade. Breakout points vary depending on time horizons and other factors. Many factors cause a bull trap, and one of the most common is the absence of buying volume in the rally to the previous high. Weak buying volume is an indication that there is not much interest in the security at a particular low price and the bulls are not strong enough to push the price up.
Abrupt and Sudden Bullish Candlestick
Other traders want to exploit or take advantage of this behavior. Find the approximate amount of currency units to buy or sell so you can control your maximum risk per position. The engulfing bar and range squeezes are not commonly discussed but they happen frequently. After a tight range or a slow trend, price suddenly makes a violent move and many orders will get triggered by the spike. Check the two above images and confirm that a huge bullish candle formed immediately before https://www.beaxy.com/exchange/eth-usd/ the trapping happened. New investors are confident that a breakout has occurred, and begin purchasing again. This lack of momentum can be considered an early warning sign that the market is due for a reversal. The calculation generally covers 14-days, although it may also be applied to other timeframes. The period has no consequence in the calculation since it is removed in the formula. Bull traps can lead to severe consequences for those purchasing during a perceived reversal.
Similar structure to April bull trap going into May fed meeting dump? 🤔 pic.twitter.com/R85JHoSUyZ
— Joshua9513 (@Joshuam67641509) July 22, 2022
A bull trap results in afalse trend reversalwhen the price is in a downtrend. A bull trap is a situation when traders put on a long position when the price of a currency pair is rising, only for the price to reverse and move lower. Determine significant support and resistance levels with the help of pivot points. Keen traders, both buyers, and sellers know that careless traders will come in and add trades during pullbacks. They then lay in wait and lure them by reversing the trends when they least expect it. In this illustration, the ranging behavior at the resistance level as well as the huge bullish candle can be seen. Therefore, it qualifies as the perfect bull trap formation. A range means that the price appears to bounce back and forth within a support and resistance level.
To exit a long position requires selling, so this selling pressure will cause the price to fall even further. At that point, the institutional traders who set the trap will sell at the now higher price and will release the “trap”. But lo and behold, it turns out it is NOT a great time, because the price soon reverses direction, catching buyers in a money-losing trap. For new and inexperienced traders, this is the hardest concept to follow and principle to internalize but it will make a huge difference in your trading. Never sell while price is going up and don’t buy when price is doing down. Only sell when price is already going down and only buy when price is going up. 3) Price goes a little in the favor of those ‘trapped’ traders, creating a feeling of confidence and security.
How do you identify a stock rally?
All the same, it is riskier to take buy trades at resistance level than buying at support zones. Experienced traders understand that this is the ultimate test of the continuation of a trend after breaching a major support or resistance zone. Read more about if i bought ethereum calculator here. Similarly, they are very useful in identifying and completing the bull trap formation. When an engulfing pattern forms after the classic bull trap pattern has formed, then it is a straightforward indicator that a strong bearish move is about to happen. The last characteristic of a bull trap setup is that it forms a range-like pattern on the resistance level. The final feature of a bull trap arrangement is that it creates a range-like pattern on the resistance level. The first indication of an approaching bull trap is a powerful bullish momentum maintained for a long time, but which reacts swiftly to a particular resistance zone. Bull traps are used by both day traders and long-term investors to take advantage of unsuspecting market participants. However, the opposite happens, and you find yourself trapped in a losing position.
A high RSI can be a warning signal of either a potential bull trap or bear trap. I said to myself, “You are in a losing trade and it’s really bad. If you close the trade out here you will get the immediate relief of exiting the position, but remember what happened with Zynga”. So instead of panicking, I looked at the chart to see the next support level down. Below is an example of a bull trap that takes place in the stock Honeywell over a two day period. HON broke out on the close of 9/6, only to gap down and break the low of the preceding range on 9/7. A bull trap is a chart pattern that often appears at the end of an uptrend. The gullible and/or amateur traders who fall into the bull trap will oftengo long, thinking price will rise further. Bull traps tempt traders into entering long positions based on the expectation that price will continue to rise which never happens.
We are very thankful to you for helping people like us because of we are able to learn and earn in the market. I love a strong trend thanks to your books, this specific email will help a lot. An EA won’t help you if you don’t have proper risk management. I’d like to look for a buildup first to form prior to the breakout. You can also exit your trades at the nearest swing low, Support area, etc. Well, what I’d like to do is trail my stop loss on the previous candle high. This way, your trade has room to breathe and you avoid getting stopped out on a “sudden spike”. When the price forms a build-up at Resistance, it’s a sign of strength.
A bull trap occurs when longs take on a position when a stock is taking off, only to have the stock reverse and shoot lower. This counter move produces a trap and often leads to sharp sell-offs. If you haven’t encountered a bull trap, then you don’t know about pain. After trading for 19 years, getting caught in a trap is one of the worst feelings in the world.
Using a stop loss will help you limit your loss if you fall into bull or bear traps. To get the most out of stop loss orders, you need to get accustomed to using them every time you trade. A stop loss will always keep your losses in check, so you do not lose more than you can afford to. In a bid to get into market trends early, many traders get caught in traps and lose significant amounts of money. Unfortunately, these traps occur very often when trading cryptocurrencies. Understanding how these traps work and how to avoid them can be the key you need to enter into the right reversals. Now that you understand exactly how the bear and bull traps work, it will go a long way to helping you avoid being trapped yourself. It will also help you to identify when a trap is being created and you will be able to take advantage by taking the correct side of the market. As the first chart example shows below; these major resistance levels regularly hold.
Its banking subsidiary, Charles Schwab Bank, SSB , provides deposit and lending services and products. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons. Schwab does not recommend the use of technical analysis as a sole means of investment research. Bullish investors may be trapped by this brief increase in price, buying more shares only for them to drop even further in price. After reaching a price of $30, XYZ again begins to gain value, rising to $35. During this time, investors begin purchasing shares, expecting XYZ to return to its previous highs.
This helps to confirm that the price of the security is more than likely to increase. Stay tuned for further updates, crypto guides, and market insights from LetsExchange. You can also follow us on Twitter, Facebook, Reddit, Instagram, LinkedIn, Medium, Quora, Telegram, Steemit, and Bitcointalk for first-hand information from our team. False news – information about listing on major exchanges, integration with a major service, etc. influences the token price positively by pushing it up. But if the information is false, the price surge will be followed by a sudden and abrupt drop.