What Is A Bull Trap And How To Avoid It?

What is a bull trap and how to avoid it? As we know, in trading you have to have a strong heart if you want to last in this activity. It is common for novice investors to lose their savings in just a few hours! You have to learn to avoid all the pitfalls so as not to find yourself unprepared in the face of the trading jungle!

The bull trap is mainly caused by a lack of information on the part of the investor. The latter buys a rising stock without seeing that it is in fact a bubble. When this bubble bursts, the damage is irreversible and directly impacts the wallet.

The bull trap explained for dummies

The principle of the bull trap is relatively simple . This effect is defined by the fact that investors deceived by the rise of a stock (bull run) buy securities before it collapses.
It is very often a decoy that responds to financial mechanisms. The stock market has a great deal of intuition indeed.

It acts according to psychological factors of trend, anticipation, and panic on the part of shareholders. It is therefore necessary to be vigilant and know how to read the events announcing a bull trap.

It is possible to limit the damage associated with this type of phenomenon. To avoid any problems, we advise you to invest in a “stop-loss order” when you have a doubt. It is a system that will resell your shares from a certain amount reached.

The bull trap: a fight between bears and bulls

The mechanism of the bull trap can be compared to being a mouse trap. Here, the bait corresponds to the sudden increase in the value of an asset.

In financial jargon, the terms bulls and bears are used to refer to shareholders struggling to rise and fall in the value of a stock.

On the one hand, the bulls are in charge of driving up the price by any means at their disposal. On the other hand, bears work to drive down the price of a stock.

Then comes a breaking point where the bears will prevail over the bulls. It is when the latter release the pressure that the bulls will regain control and drive up the share price again.

Shareholders entering the market can then take this rise as a golden opportunity and buy shares. Uninformed, they will bear the brunt of the next inevitable crash .

The bull trap in the crypto markets

The crypto market works precisely the same way as the others. It is present on altcoins which often take a lot of value before falling.

Buyers then find themselves trapped in an endless downward spiral. To monitor the bullish or bearish movement of cryptos, visit a real-time crypto price watch page.

How to recognize a bull trap in a crypto market

To avoid being tricked, we give you some tips to follow:

• Pay attention to the RSI (relative strength index): this is a technical indicator that allows you to understand if a stock is overbought. It is generally based on a period of two weeks. It highlights the increase in the frequency of purchases by investors and therefore a possible future crash.

• Little increase in buying volume: if you see the stock buying slowing down, the stock is likely to fall.

• Look at the resistance level: during an impending crash, you will notice that buyers and sellers begin to battle it out. This is a very effective sign to start withdrawing.

Example of a bitcoin bull trap stress test by the “Crypto Rover” Twitter account.

Of course, there are other indicators. However, you have the first weapons to learn how to spot a bull trap about to occur.

You now have all the keys in hand to avoid a bull trap.