In such cases, the initial downtrend is not indicative of continuing price decreases as it is a temporary dip caused by profit-taking and institutional manipulations. Instead, the price will increase again once the institutions scoop the available assets. Thus, a high RSI can also be indicative of a potential bear trap. A high RSI can be a warning signal of either a potential bull trap or bear trap. Bull and bear traps are hard to identify by nature as they go against expectations and typical price trends. It is a false indication of a reversal from an uptrend into a downtrend.
Definition and Example of a Bull Trap
Alternatively, it may cause them to sell off their stock or cryptocurrency assets, in order to take profits and prevent losses. However, the asset ends up continuing on its uptrend and the bears suffer losses or opportunity costs. Normally, we might expect this breakout to result in a series of higher highs as the level of resistance has been breached. But, in this particular example, the breakout was actually a bear trap.
What is a bull trap?
However, by conducting careful technical analysis and fundamental analysis on the asset, traders can identify and avoid potential bull or bear traps. Bull traps and bear traps are forms of the whipsaw pattern, which describes the movement of stocks in a volatile market where the stock suddenly switches direction. These are unexpected movements that can incur great losses to traders if they are not careful. Understanding more about bull traps and bear traps can allow you to take more appropriate risk mitigation measures while investing.
Have you been sucked into a bull trap?
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- Always plan your trade or investment with a stop-loss in mind and the discipline to administer them if they trigger.
- The stock climbs higher, usually on heavy volume, and then sharply reverses back down.
- Eventually, the selling forces them to stop out to avoid larger losses.
- A bull trap is when a market or security that is on a downtrend experiences a brief increase in value.
The opposite of a bull trap is a bear trap, which occurs when sellers fail to press a decline below a breakdown level. A bull trap occurs when longs take on a position when a stock is taking off, only to have the stock reverse and shoot lower. [1] This counter move produces a trap and often leads to sharp sell-offs. If you haven’t encountered a bull trap, then you don’t know about pain.
In this article, we’ll discuss how to spot bull traps and what preventive measures you can take to avoid them or even use them in your favour. An example of a market-wide bull trap would be what investors saw in the S&P 500 from 2007 to 2009. Over the next two months, the S&P recovered around half its losses.
If there are not enough sellers to keep the downward momentum going, buyers may step in and drive the price higher. These patterns indicate a sharp bounce after a steep fall, inspiring hope that the stock is on its way toward reversing higher. Unfortunately for the bulls, the stock peaks quickly and reverses sharply to resume the downtrend.
The lesson of the bull trap is that buying at the very first sign of a possible new uptrend can be dangerous. Many of these attempted moves higher may fail because there is little overall buying https://cryptolisting.org/ pressure to begin with. As the number of buyers dwindles, the price may push slightly above a prior high point – the trap – only to fall sharply because sellers are becoming more dominant.
A bull trap is the equivalent of a hard rug pull after you’ve been convinced the surface has stabilized. A bull trap occurs when short-term positive why profits don’t equal cash flow sentiment sharply drives up a stock, often through key resistance levels. This buying activity causes new buyers to chase the stock as they jump in.
