Administering discipline is easier said than done whether stopping out of bull traps vs bear traps. A bull trap, meaning a time when stocks in a downtrend quickly reverse higher, stirs up the fear of missing out (FOMO) emotion. After that, a sharp spike in a stock’s price attracts more bulls and reverses with a sharp drop that continues to fall lower, shaking out more bulls along the way. Bulls don’t want to or don’t ask themselves, “Are we in a bull trap?” until the pain is too great. However, sellers start placing sell orders, hoping that the resistance level will hold since most bullish momentum has been depleted.
Identify Bull Traps and Bear Traps with Volume Indicators
- But then the price moves above a prior swing high, drawing the downtrend into question.
- The first hint that a bull trap is on the way is a strong bullish trend that has been sustained for a long time, but it reacts significantly to a specific resistance zone.
- If you are not in control of your emotions, a quick 10% gain can cause a bit of an ego trip.
- This range might not be perfect, especially on the upper side, because the market might still be making smaller higher highs.
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If you are uncertain about whether the trade you are entering is a bull trap, you may choose to be more prudent and set appropriate risk management measures. In the chart, the currency pair has entered a downtrend, which is shown by a series of lower swing lows and lower swing highs. But then the price moves above a prior swing high, drawing the downtrend into question. Those looking where can you short crypto to buy may choose to jump in, but the rise quickly fails, and the downtrend continues. Let me tell you that from Friday until the close on Monday was one of the hardest periods for me in my trading career. Even though I just committed myself to the possibility of a loss down to $1.68, I couldn’t stop myself from thinking, well what if the stock goes to 90 cents or zero!
What is a Bull Trap?
Panic trading happens far often than most people would like to admit. The reason is most traders are either in concentrated positions or simply have not come to grips with the concept that they can lose the money. This leads to these bull traps, where the weak longs panic during climatic events and unload their shares to the smart money. If this concept is worth respecting, then a trader should never attempt to take buy trades at resistance levels.
Lack of increase in volume
The best way to escape a bull trap is set a stop-loss on your position as you open it. This will help you to prevent heavy losses if you’re caught out by a bull trap. I never read the news, but sometimes desperation will push a trader to his limits.
MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… As you can infer, the price was rising but then experienced a sharp decline followed by a series of lower swing highs (descending red line). IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. Discover the range of markets and learn how they work – with IG Academy’s online course. A popular technical indicator to identify overbought assets is the relative strength index (RSI).
Our Next Generation trading platform combines institutional-grade features and security, with lightning-fast execution and best-in-class insight and analysis. A block trade is a large-sized stock order that takes place outside of the publicly traded stock market. By the definition of the NYSE and NASDAQ exchanges, a block trade is a trade of more than… So, remember if the market goes against you in a violent way, your stop thresholds have been wildly exceeded and you feel complete hopelessness.
Trading volume should be higher than average to indicate momentum and mounting pressure for either a strong uptrend or market swings and reversals. Thus, low trading volume is a warning signal of potential bull and bear traps. A dead cat bounce is a general term for any upward price movement that occurs during a strong downtrend. A bull https://cryptolisting.org/ trap usually has technical elements involved, such as the price moving above a prior resistance level. A dead cat bounce may exhibit similar characteristics to a bull trap. The price of the asset may experience a short-term decline, dropping below a support level, enticing people to sell existing long positions or take short positions.
Whereas a bull trap traps buyers in a losing trade, a bear trap traps sellers or short sellers in a losing trade. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. 70% of retail client accounts lose money when trading CFDs, with this investment provider. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money.
