What Is A Cryptocurrency Bull Trap & How To Avoid It?

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What Is A Cryptocurrency Bull Trap & How To Avoid It?

In addition, the indicator invalidated the multi-month rising trendline, signaling an end of the bull run. Another way to avoid a bull trap is to wait for the indicators to provide enough evidence that the pattern is unlikely to develop. Ethereum eventually proved this was a bull trap pattern, as prices fell to retest the old low at $3,124. After that test failed, prices collapsed 40% in a short period — in this case, just a matter of hours. Crypto markets frequently trap most traders into buying too early. Let’s look at a couple of examples where the bull trap led to quick and large collapses in Bitcoin and Ethereum prices.
  • 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.
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  • You should be wiser and place the Buy Stop above the resistance level to be sure the price will increase.
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The bulls are comparatively uninterested and are not aggressively buying shares. The point is, bullish or bearish short-term price action doesn’t occur in a vacuum. 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. 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. I remember thinking, something must be wrong with my data feed. So, I went out to Google and typed in “CHTP quote” and again saw results of $2.50.

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All these events occurring following an extended trend of lower unemployment, signaling the coming end of a business cycle — check. New market highs tagging the upper monthly Bollinger band on a monthly negative RSI divergence — check. A pseudonymous trader known as “Crypto Capo” predicted Bitcoin would see a relief rally to $18,000 as it dropped to the $16,000 region. EUR/USD is trading above 1.1850, marginally higher on the day. The dollar is retreating with US yields, in an extended response to Friday's Nonfarm PAyrolls. Market trends still suggest that sentiment is progressively deteriorating. However, we have seen an impressive improvement in trend indicators since the end of 2018. If we get continued improvement, we would expect the trend component of our framework to change to green from the current red condition.
Officially, a bear market occurs when asset prices fall by at least 20% from their previous highs. When price then reverses, they hold on to their loss too long and/or add to their existing position. 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. A bull trap occurs when traders take a long position and then have price reverse and move lower very sharply. Traders can lower their chances of being caught by bull traps through seeking validation following a breakout through various technical indicators. False signals in the investment industry are known as bull traps and they refer to a declining trend in a stock, security or index that many thought would continue increasing. I want a lot of traders to be interested in the stock and trading it. There are a ton of chart patterns out there that traders interpret as either bullish or bearish.

Of course, this means you might lose out on some profits since you won’t be entering the trade immediately after the breakout. However, this approach may be a lot better than falling into the trap and suffering heavy losses. A range occurs when the price moves up and down within a defined support and resistance level. This usually means buyers and sellers are both fighting for market dominance, but neither side seems to find enough momentum to come out on top. A bull trap is a false signal that typically occurs in a bear market. It tricks traders into thinking that the price of an asset is done declining. Therefore, the trader thinks it’s a good time to place a buy order.

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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. These are key terminologies derived from the stock market industry which can also be applied in cryptocurrency trading. Whether traders are professional or inexperienced, these events are common and could potentially cost a lot if neither one is careful. This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.
And if China escalates further, traders have to be careful of that,” Nicholas said. Fed Chairman Jerome Powell gave a wink to investors this week during a speech in Chicago on the governing body’s willingness to slash interest rates. Fed Governor Lael Brainard told Yahoo Finance the Fed would be prepared to adjust monetary policy if economic data continues to worsen. Loosely defined by yours truly, a “bull trap” is when an investor gets sucked into thinking the coast is clear in a market or individual stock that is noticeably off its highs. The trap is usually set after a few good days for a stock or broader market that has been damaged. U.S. indices are trading higher following better-than-expected jobless claims, which lifted recovery sentiment to start off July. Benzinga has examined the prospects for many investor favorite stocks over the past week. The past week's bullish calls included oil, automaker and semiconductor giants.

I took a long position at $3.28 and the stock immediately started to rally. Fast forward one day later and ZNGA hit an intraday high of $3.62 which was a gain of slightly over 10%. If you are not in control of your emotions, a quick 10% gain can cause a bit of an ego trip. Let’s look at a real-world example from my own trading, where I did not accept the risk and therefore took an unnecessary loss. Even though a breakout occurs, traders can always check the candlesticks following the breakout to see whether it’s going to be a continuing trend or just a one-off event. Even though you did your research, you can never be completely confident of your trade decision because the market could go against you. Hence, you can use a stop-loss to limit the loss allowance and hedge your position. Divergence occurs when price and RSI move in opposite directions. This suggests that the price movement is weak and not backed by significant momentum. The information in this site does not contain investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument.

A bear trap is the opposite of a bull trap when short sellers are trapped at lower prices and the trend reverses quickly back up. The best way to avoid these traps is to wait for the technical indicators to signal a bull trend is underway, which means waiting patiently. Do not expect the market to react the way you anticipate without the confirmation of proper indicators. Always do your due diligence — and know that you trade at your own risk. Finally, the ultimate symptom of a bull trap is when prices break below the old/previous low. Traditional technical analysis will review price action in the form of old highs and lows. A bull trap occurs when a false rebound traps bullish traders into long positions.
what is a bull trap
Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice. A Multiple Top Breakout includes a Triple Top Breakout, a Quadruple Top Breakout and anything wider. A Triple Top Breakout occurs when two successive X-Columns form equal highs and the next X-Column breaks above these highs. A Quadruple Top Breakout is similar to a Triple Top Breakout, but with three successive X-columns forming equal highs instead of two. For a Bull Trap to be possible, this breakout can only be one-box. Breakouts that move two or more boxes above resistance do not qualify. The Bull Trap occurs when prices reverse after a one-box breakout and the subsequent O-Column moves at least three boxes lower. A one-box breakout is not that strong and the immediate reversal shows renewed selling pressure. The stock caught some upside momentum in early November and attempted to break above its October range resistance level but failed.

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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 what is a bull trap you know you should sell, but are unable to because you believe the stock will come back. If there is a change in the asset value but the volume remains consistent, then there is a possibility that a trap is occurring.
what is a bull trap
You should be wiser and place the Buy Stop above the resistance level to be sure the price will increase. Apply the indicator on the price chart and watch whether the volume is high on the resistance breakout. If the volume is significant, it's a sign of a strong uptrend. In this part of the article, you will find additional options to determine the bull trap in trading on the chart, noting specific patterns. Commodity and historical index data provided by Pinnacle Data Corporation.

Such a pattern is formed after the formation of the bull trap. So, when you see that the price breaks above the resistance and the bearish engulfing pattern appears, it's a characteristic of a downtrend. The signal will be stronger if the bearish engulfing pattern follows the Doji candlestick that signals buyers' uncertainty. Trading is not appropriate for all investors, and the risks can be substantial. You acknowledge that it is solely your decision to determine which, if any, PatternsWizard trading signals and contents to use for trading . Statistics provided are the result of backtests and are provided as is with no guarantee. Leverage can work against you as well as for you, and can lead to large losses as well as gains.
Breakouts are usually followed by strong moves higher, but in Bull Traps, the security quickly reverses direction. A bull trap can often result in financial losses for non-experienced or impatient traders. A bull trap chart pattern is a bearish signal when you see one forming. A bull trap can come in different forms but at the core of it, we are looking for a candlestick that is extremely bullish, break what is a bull trap the resistance zone, and then turns bearish. But the truth is that a trend can last much longer than anticipated. The best way to trade trends is to filter your trades in the direction of the larger trend. For example, in the bull trap pattern, the trend is still lower; you need to filter the signals. During the initial downtrend, range expansion will take place, indicating that momentum is strong.
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