A bull trap occurs when the price of a coin begins to move high and then suddenly reverses and declines. A trap deceives traders to act on the buy signal and enter long trade positions. Hence, it leads to significant losses. The difficulty of a bull trap is that it is very difficult to identify it because prices are likely to move higher after a breakout and do not usually reverse.
How to avoid a bull trap?
The best way for traders to avoid a bull trap is to recognize warning signs such as low volume breakouts and act ahead of time. Here are other trading strategies that could help you avoid a bull trap.
- A trader who wants to avoid a bull trap should look for higher than average momentum when following a breakout.
- Traders should look out for bullish candlesticks that confirm that prices are likely to rise and act on warning signs as soon as they experience such signals.
- Traders should evaluate whether the market is overbought which suggests a bearish reversal from the current bullish trend in prices.
- Traders should also patiently confirm whether the uptrend will continue or not before entering a long trade position.
- Traders should place a stop-loss on their trades during breakouts to avoid losses. This is crucial to do if the market is moving too quickly.
How Can I Identify a Likely Bull Trap?
Identifying a bull trap can be easy for a trader who knows what to look for. These are some common signs that a bull trap is about to occur:
Multiple Testing of Resistance Level
One of the signs of a likely bull trap is a strong bullish trend that has lasted for a long time, A strong uptrend with little bearish interference means the buyers are pumping in everything they have. However, when the price gets to a certain resistance level, they tend to fear it and the price declines before going even higher.
Long Green Candle Just Before The Market Reverses
An extended green candlestick at the end of a Bull rally could indicate that more buyers are buying coins in a bear market. They mostly assume that the breakout has been confirmed and that it is now safe to resume buying. It could be that whales are purposefully inflating the price to attract naive buyers. When there are enough buyers in the market, the sellers begin to dump, leaving the buyers to cover the losses.
A Range Is Formed in the chart
When the price bounces inside a predetermined support and resistance level, it is said to be trading in a range. This reflects that both buyers and sellers are competing for market domination, but neither side is gaining enough traction to have the upper hand. Buyers try to protect the support level and sellers attempt to defend the resistance level. Eventually, one side wins.