While the cryptocurrency market has its own set of tricks, today we'll offer a technique from the bull trap playbook. As long as the market is still heading lower, this pattern lures traders into buying.
The Bull Trap is one of the most well-known traps that traders continually slipping into on the financial markets.
A bull trap, as its name suggests, is a chart pattern that ensnares bull traders. As you are aware, bull traders move with the trend upward.
However, fashions come and go. The bull traders frequently get caught at this time since the trend will eventually terminate or at least have a more significant correction than simply a minor retreat.
Profiting from an uptrend are bull traders. They fill their positions when the price retraced to a lower level.
And as the price makes a new rally and reaches new highs, they take profits. However, at some point, a pullback fails and the price begins a downtrend.
They fall into a trap!
Bull traps occur when an asset's price rises above past support levels, luring traders and long-term investors to add to their long holdings or buy more of the asset.
Bull traps are so-called "traps" because of their illustrious reputation as misleading indicators that have disastrous effects for participants in all markets. In fact, they are one of the factors that traders should watch out for when an asset complete a breakout, or a price movement below a support level, and should be wary of any abrupt price reversal. Unfortunately, the majority of retail investors, especially those in the crypto area, assume that a breakout will always be followed by a greater price surge, even if this isn't always the case.
One of the most crucial tools for day traders is technical analysis, which uses the price chart of an asset to examine price trends and identify trading signals in an effort to forecast future moves. The breakthrough above a resistance level, which happens when the price chart moves above a particular line that has regularly been reached but never beyond previously, is one of the most significant indications.
Bullish traders typically anticipate future price gains as a result and buy the asset. A bull trap happens when the signal proves to be incorrect and the price restarts its downward trend right after the breakout over the resistance line, even though that evaluation is occasionally accurate. As a result, the bulls who purchased the asset became stuck in the trades they entered into based on the false signal.
avoiding bull traps
- Study technical analysis.
The essence of technical analysis is the use of historical price data to infer probabilistic market direction assumptions. Although it may appear overwhelming and extremely complicated, you don't need to be an expert. Finding support and resistance levels, identifying straightforward patterns like wedges and patterns, analyzing volume and moving averages, and spotting RSI divergences can all make a significant difference and won't take you months to master.
- examine the volume
Good volume across multiple candles is necessary for true trend reversals (time periods). An abrupt pump with a low volume suggests manipulation and a lack of trust among retail customers. For example, the volume was still weak whereas June and July 2021 were jam-packed with traps.
- resist the urge to give in.
Upon encountering a significant level of opposition, many bull traps lose their effectiveness (a value above which the price has trouble going because a lot of traders are willing to sell at that price). Due to FOMO, novice traders frequently enter markets right before a peak (the fear of missing out).