What Is a Bull Trap and How to Avoid Falling in It
A bull trap is a situation when a trader buys an asset whose price suddenly started growing in the hope to get a profit. However, after a short surge, the asset price drops again, and the trader loses his funds. That’s why such a situation is called a bull trap.
Why Do Bull Traps Occur?
Bull traps occur frequently when the market is unstable as it is happening now with the cryptocurrency market. There are several reasons for their occurence:
- 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.
- Instability in the market - in such a case, bulls and bears are fighting to either pull the price up or press it to drop lower. For a moment, bears may win, and the token price increases. But if the market is bearish, and there are no reasons for the trend to change, the price will drop again.
How to Identify That You are Dealing with a Bull Trap
A bull trap is not the start of a steady price increase. Therefore, it can be expected that there are some indicators that signal that a price surge is not the start of a bullish trend but a bull trap. When deciding whether to buy a token when its price starts growing or not, check the following details.
Low trading volume
When traders’ interest in a coin is growing, the trading volume of this coin is growing, too, because traders start buying and selling it. It pushes the token price up.
If you see that the token price has surged but the trading volumes are low, it means that traders aren’t interested in the asset, and the price surge was caused by something else. In most cases, low trading volume during the token price increase is an indicator of a bull trap.
If you have a look at the graph below, you will see a sudden price surge of BTC, while trading volume isn’t increased. It is a sign that this price increase might be nothing more than a bull trap after which the coin value will drop to its previous level. And indeed, it does so.
Further, you will see that the trading volume is growing together with the coin price. It means that there is a high possibility that the coin value will continue growing even though some drops are still possible due to the high asset volatility.
Indeed, further, we can observe the coin increase in value along with the increase in trading volume.
No momentum
It is natural for a market to move in cycles. When the cycle top is reached, it is time for price consolidation. When the consolidation is absent, it means that the time for the possible trend reversal hasn’t come yet. If the market was ruled by the bears by then, and the price surged without a consolidation stage, it will drop soon.
There Is No Trend Break
Even if the asset price increases it doesn’t mean a change in the current trend. As long as the price increase is lower than the previous one, we deal with the bearish movement, like here, for example.
Such a trend is the worst time to buy the coin unless you really need to do it. Experienced players will wait for the trend to break and buy the asset when its price is climbing upwards in a bullish trend
Abrupt and Sudden Bullish Candlestick
When amidst a bearish market, you suddenly see a sudden bullish candlestick, it might mean the last desperate attempt of bulls to control the market. It can be caused by some or all of the following:
- Newbies believe that a trend break occurred and start purchasing the coin.
- Big players in the market intentionally push the price up in an attempt to make inexperienced traders start purchasing the coin.
- Sellers let buyers dominate the market to enable the selling of limit orders above the resistance level.
In such conditions, the price surge occurs right before its reversal.
How to Trade During a Bull Trap?
When a bull trap occurs, the trend is still bearish. That’s why the best way to trade is to look for short selling opportunities and place stop-loss orders to minimize the losses.
For long-term investors, a bull trap opens an opportunity to buy a coin at a lower price when its value drops back to its previous level.
Bottom Line
The cryptocurrency market is highly volatile which makes each change in price even more abrupt. That’s why it is important for a trader to know the differences between a trend change and a bull trap. It will help to avoid significant losses and even benefit from short-time price surges.
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