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Transactions in today’s age have evolved–from personally running errands to the banks to conveniently paying bills on your screens. With the birth of cryptocurrencies, faster and easier transactions were made possible. Of course, there are risks associated with it, especially with the presence of a bull trap.
The name itself means it is something is deceptive, and it might put market players at risk. Here is everything you need to learn about bull traps.
What Exactly Is A Bull Trap?
Simply putting it, a bull trap is a false signal. It is a pattern that makes it seem like financial assets are on their road to recovery after a certain downtrend. The reality is that asset or stock values are bound to decline even more.
To bring more clarity, you must know of a breakout first. A breakout happens when the stock prices move below the support and above the resistance areas. It indicates the direction of the price levels–whether they will increase or decrease. The trickery caused by the bull trap will result in crypto traders’ confidence in a breakout, buying more assets with hopes for stronger price rallies.
But in some cases, it hits weaker upturns. When this happens, it causes financial losses to market participants.
How To Detect A Bull Trap?
With the risks associated with a bull trap, it is important to be smarter by knowing how to detect its early signs. Take caution in looking for signals in an extended bull rally after a breakout that reached above the resistance level. Usually, breakouts with low trading volumes signify an impending bull trap.
Specifically, there are more ways to determine if a trap is about to happen. They are as follows:
1. Perform a technical analysis of the assets or stocks you want to trade. This method use charts that measure and identify the price direction. It can also determine signals on the price chart, which you can use to identify possible movements.
2. Another way to evaluate your stocks is by using fundamental analysis (FA). It considers a more comprehensive approach wherein a trader shall look at the internal and external factors that affect an asset. Also, it sees an asset’s intrinsic value.
2. Test the resistance levels, and you should not do it once but multiple times.
3. A range-like pattern may be formed when a price bounces back and forth within support and resistance level. Look out for this, as it can lead you to spot a bull trap.
How To Minimize Risk When Trading Bullish Breakouts?
The best route to fend off financial losses is to perform ways that lessen your risk of getting caught in a bull trap. Doing so may require a keen eye, strong discipline, and strategy during trading. Here are some of the ways you can do to avoid a bull trap:
1. Do not trade when you’re already late. A more extended uptrend may indicate a bull trap. So if you are attempting to trade when an uptrend has already travelled far enough, rethink, as it may be a trap.
2. Be patient with retests. It is crucial to evaluate prices carefully on every level. It would be great to retest them before buying orders while on the upper momentum.
3. Look after price movements. It may be the best way to read the market and steer away from bull traps.
4. If prices are on resistance levels, do not try to buy assets. The trading culture is buying at the support levels and selling at the resistance level. Unless, of course, the retest indicates a start of a new trend.