Bull trap – what is it in cryptocurrency trading?
What is a Bull Trap?
A bull trap is a false signal for cryptocurrency traders where a rally is abruptly interrupted by a reversal and breaking of the previous support level. This change "traps" traders who mistakenly took the trap for a trading signal. As a result, open long positions can lead to significant losses.
Causes of Bull Traps
The main causes are as follows:
- Bulls are unable to sustain the trend; the number of purchases decreases, or there is planned profit-taking.
- Extended sideways movement leads to the breakout of the upper level and a spontaneous reversal.
- High volatility and news background contribute to sharp changes in the price.
As a result, the realization of a bull trap leads to panic selling of the coin, exacerbating traders' losses.
How to Avoid Bull Traps
The following set of recommendations can help avoid falling into a bull trap:
- Enter the trade late if there is no specific and reliable signal. Typically, novice traders rush into trades, while such patience is characteristic of professional traders.
- Use the trend indicator SMA; it allows for the most accurate identification of such traps. The indicator helps avoid significant risks and preserves traders' assets.
- Decreasing trading volume or the appearance of doji candles may indicate the approach of a bull trap.
- Wait for a decrease in volatility; this phenomenon is also known as "chop," and only experienced market participants can trade on it.