What Is a Cryptocurrency Bull Trap & How to Avoid it?

The downward trend then reverses back upward, “trapping” the unsuspecting bear into a losing position. What causes a bear trap is not just the downward price movement but a drop in price below a key support level. The bearish investor or trader expects a break downward through a resistance level to be followed by further downward movement. Thus, they are “trapped” and lose money after the reversal in price back upward. Breakout trading profitability declined with the introduction of AI and particularly quantitative trading bots in recent years. Usually, these bots can easily see the depth of market orders and trap traders in main resistance levels which cause bull traps. 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. In the case of a potential bull trap, having a high RSI and overbought conditions means that there is mounting selling pressure. Traders are looking to take their profits and are likely to exit the trade soon.

Further, some of the breakout traders panic and close their long positions. Because there was little to be bullish about in the first place, more experienced traders may take the elevated price as an opportunity to sell. Psychology also comes into play when those buyers realise there are no other buyers coming in after them. As selling begins, the traders who just bought may panic and sell, further driving the price down. As the number of buyers dwindles, the price may push slightly above a prior high point – the trap – only to fall sharply because sellers are becoming more dominant. If you are uncertain about whether the trade you are entering is a bull trap, you may choose to be more prudent and set appropriate risk management measures.

Emotions Behind the Pattern

Mass selling or buying a particular symbol affects the price, temporarily causing it to move in the opposite direction. It’s harder to understand when to trade with multiple indicators. Following up on a particular approach for understanding the crypto market after mastering it, one should perform further research. Most significantly, it is a great way to test it out before using it to execute actual deals. For someone who has never traded previously, it’s important to know that opening a cryptocurrency exchange account is a must for thriving the volatility in the crypto market.

Also, increasingly lower trading volumes leading into the peak of the rally can signal an impending reversal and continuation of the greater bearish pattern. Ultimately, traders can be sure of a bull trap if the rally fails to exceed a previously established breakout support level. If there remain not enough sellers for keeping the downward momentum going on, then the buyers might step in and drive the price higher. Volume is considered to be another important indicator for looking out for in both the bull trap and bear trap. Trading volume needs to be higher than the average for indicating momentum and mounting the pressure for either a strong uptrend or the market swings and the reversals.

What is shorting a stock example?

In the below example we’ll explain liquidity pools in details. If you want to fill a big sell order in a certain price, you need lots of buyers to buy from you. So, you should generate a fake demand in that price area and trap buyers there. One of the most useful concepts regard to bull trap is liquidity pools. In OBV indicator article we explained how you can trade breakouts in details with highe win rate.

A bull trap occurs when a steadily declining asset appears to reverse and go upward, but soon resumes its downward trend. Hypothetical performance results have many inherent limitations, some of which are described below. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment.

If you look closer at the previous price-action, you can notice multiple retests of the resistance level. This is the first sign that buyers don’t have enough power to break above that resistance, and that any upside breakout could actually prove to be a fake breakout or bull trap. If the asset is considered overbought, it will likely perform a bearish reversal shortly after the breakout. Bull traps have the potential to form on resistance levels. I have also been on the wrong side and have been caught out many times with bull traps.

Bull traps refer to fake upside breakouts after which the price makes a sudden and unexpected reversal, breaking below a well-established support level. Bull traps can be quite frustrating, especially if your strategy involves trading upside and downside breakouts, but savvy traders can also use them to their advantage. However, traders who also follow market fundamentals may know in advance that an upside rally in certain markets doesn’t make any sense. If the pullback fails to find support at the previously broken resistance level, chances are that we’re dealing with a bull trap. Bear traps form when the market breaks below an important support level, followed by an immediate and abrupt reversal. While not always a 100% sure sign, a market testing resistance levels multiple times and failing to break out indicates weak bullish pressure. It can signify that even if a breakout occurs above the resistance, it is unlikely to sustain its momentum.
In some of the markets, there might be plenty of investors who are looking to purchase stocks and a few sellers who are ready to accept their bids. In such a case, the buyers may also increase their bid, which is the price that they are ready to pay for the stocks. This is going to attract even more sellers to the cryptocurrency market and the market moves a bit higher owing to the imbalance between the buying and the selling pressure. As you can guess, the price was actually rising but then it experienced a strong decline. This is followed by a series of the lower swing highs or the descending red line.

What I am saying is that once you have recognized you are in a trap , instead of panicking think through the next level down where a bounce could begin to reverse the trap. So you could be saying to yourself, well this trade worked out, but what if Zynga had tanked and you lose way more money. So, you go from double digits to a losing position in a matter of seconds. Well, throughout this article, I will provide one simple strategy to protect yourself from being caught in the trap – accepting the risks. At this point, you have just entered what I like to call the freeze phase. This is where you know you should sell, but are unable to because you believe the stock will come back. For the last 8 years, we have been providing a wide range of trading-related blog articles, trading guides, podcast episodes and tons of trading videos on Tradeciety.
Large traders will buy large amounts in order to artificially drive the price upward to create a “false bull market”. 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. People in disbelieve continue to hold on to their positions that suddenly turns into a loss. Traders who are aggressively buying are making huge profits, and the opposite party is selling, with the belief of price turning again. There are a few kinds of stop-losses to choose from, including standard, trailing or guaranteed. The idea of the Buy Stop pending order is to open a trade when the price breaks above a certain level and keeps growing. Place the Buy Stop above the resistance level to be sure the price will increase. If you’ve never heard about the Volumes indicator, it’s high time to learn about it. It may rarely provide trading signals, but this instrument is widely used by traders.

This way, you can rake in some profit to offset the previously sustained losses. 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. A bear trap pattern involves technical trading and is not a suitable strategy for long-term investors. A bear trap involves short selling of a stock or other investment security. However, a bear trap and short sale are not the same thing.

Breakout Points, Resistance Levels, and Other Technical Indicators

This causes traders to open short positions with expectations of profiting from the asset’s price decline. Alternatively, it may cause them to sell off their stock or cryptocurrency assets, in order to take profits and prevent losses. However, the asset ends up continuing on its uptrend and the bears suffer losses or opportunity costs. Checking the trade volume of the affected asset can help you identify and avoid bull and bear traps. For example, when there is a reversal, there should be a noticeable increase in volume because many traders and trading orders are usually involved in the process. However, if you notice a reversal without a noticeable increase in volume, it is likely that the price change will not continue, which is just a trap. At the beginning of a bull trap, the crypto asset breaks through its resistance level and seems to be on an uptrend.

In this article we will explain how bear and bull traps work and how to avoid them. We may conclude that when the price hits a significant level of resistance, we must not make a trade. We’ll have to watch for a turnaround trend to see if the bulls’ drive is still robust or fading. For example, in a 5-unit Renko chart, a 20-point rally is displayed as four, 5-unit tall Renko bricks. Basic trend reversals are signaled with the emergence of a new white or black brick. A new white brick indicates the beginning of a new up-trend. A new black brick indicates the beginning of a new down-trend. The price action is simply the manifestation of the bullish and the bearish actions of the people. 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.

If you are not in control of your emotions, a quick 10% gain can cause a bit of an ego trip. In the flash of an eye, all of the worries wash away from you and your confidence begins to build. Then just as quickly as you feel you are in control of the situation, you wake up to a morning gap down or if you are day trading, the stock just plummets on high volume. People in disbelieve hold on to their trades that are suddenly turning into a loss. However, when they reach a resistance level they’re unwilling or afraid to breach, the https://www.beaxy.com/buy-sell/drgn-btc/ price will typically reverse before going even higher. When a stock experiences a sharp drop or gap-down with enormous red candles but then rebounds very gently, it’s an indication of a bull trap. There is no fixed rule that buying at resistance-zones-turned-support is wrong. Traders know that a support zone, when broken, becomes a resistance zone. In the same way, a resistance zone, when broken, becomes support. Candlestick patterns and formations are very important when seeking to identify potential market turning points.

Should S&P 500 fail to rally up above 4400 followed by a break below the support level at 4270, the bullish case will be violated. Refer to the chart below for an illustration of the failure case. Place our stop loss 2 pips above the high of that forex bull trap candlestick. A bull trap is a chart pattern that often appears at the end of an uptrend.

Many retail traders tend to look for trading opportunities which have a good profit in a short period of time, and this mindset causes them to be the first victims of bull traps. Open a demo account or to practise trading on bull traps within the financial markets. This is possible via spread betting and contracts for difference . First, there is often a desire on the part of buyers to enter a trade at the first sign of a price rise. This may make these traders more susceptible to getting ‘trapped’ because there is little evidence of an actual sustainable move to the upside.

However, it may be difficult to time your entry accurately. This may work best if you believe there will be a short squeeze or believe in holding the asset in the long term. Read more about aion power lockbox here. If you believe that the cryptocurrency will rise in the long term, for example, you may have greater confidence in buying the asset during its dip. Alternatively, you may choose to trade the bull trap intentionally and profit from the price decline. For example, you can open a short position once the bull trap is in effect, either directly or with financial derivatives such as Contracts of Differences . A high RSI can be a warning signal of either a potential bull trap or bear trap.

Because it tells you the buyers are willing to buy at higher prices . When the price forms a build-up at Resistance, it’s a sign of strength. When you “chase” a breakout, there’s no logical place for you to set a stop loss so you’re likely to get stopped out, even on a pullback. After all, the textbook says a breakout is “confirmed” when the price closes above Resistance. He is the most followed trader in Singapore with more than 100,000 traders reading his blog every month… Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California life, accident, and health insurance licensed agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans.
If there is little or no increase in volume on the breakout, it’s a sign that there isn’t much interest in the security at that price and that the rally might not be sustainable. Weak buying volume is an indication that there isn’t much interest in the security at a specific low price and that the bulls aren’t strong enough to push the price higher. Let’s say you’re looking at a chart of an asset in a downtrend. After a while, the price reaches a point where it starts to consolidate sideways in what’s called a “range.” ● Eventually, the market went down a little, then back up to the resistance zone.

• Investors are always told to leave emotion out of their trading or investment decisions.
• As a result, sellers continue to overwhelm the scarce buyers, and the pricing is readjusted to lower levels.
• Whereas a bull trap traps buyers in a losing trade, a bear trap traps sellers or short sellers in a losing trade.

However, since most buyers have exhausted their resources, the sellers start pumping in their orders since they dominate strong resistance zones. The keen buyers who know this phenomenon start closing their trades. The sellers, upon seeing reducing buyer volumes, pump in more sell trades. After this, the market slows down before more buyers jump in and try to push the price past the zone of resistance.