What is bull trap? (Part 1)
The bull trap is a false signal in technical analysis and trading. This trap occurs when in the downtrend of a stock, index or cryptocurrency, the price movement changes for a while and convinces market participants that the uptrend has begun; But the trend is reversed and breaks the previous support level downwards.
A bull trap occurs when a trader or investor, thinking that the downtrend is over, buys stocks or a pair that has broken a resistance level.
This is very common in conventional technical-oriented strategies; But unlike many cases where the analysis works well, in bull traps the price changes direction again and continues the previous downward trend.
In this way, traders are trapped and lost by buying assets or taking long positions.
Traders and investors should avoid traps by obtaining approvals from the stock or asset chart. For example, a trader should pay attention to the volume of exchanges to ensure the start of the uptrend, this volume should be higher than the average volume of previous candlesticks.
The use of candlesticks can also help, to ensure the uptrend should be followed by cow candles.
When resistance is broken, but the volume of exchanges is not sufficient, or uncertain candlestick patterns such as the “Doge Star” are seen in the diagram, there is a possibility of a bull trap.
The bull trap may also be referred to as the “whip pattern”. The opposite of a bull trap is called a bear trap, and it is said that in an uptrend, prices fall for a while and then return to the original uptrend.