Many traders get into traps and lose huge sums of money in an attempt to get ahead of market trends. Unfortunately, these pitfalls are common when trading bitcoins. Understanding how these traps operate and how to avoid them may be the key to entering the appropriate reversals.
We will explain how bear and bull traps operate and how to avoid them in this post.
What Is a Bear Trap?
A bear trap is a technical pattern that occurs when the price of a crypto asset reverses from an upward trend to a negative trend. Simply put, these are phony price declines that a few traders often cause in order to deceive new traders into entering a short (sell) position.
This behavior is known as a “bear trap” because it catches novice traders who are attempting to profit from the phony bearish (downward) swing.
What Is a Bull Trap?
A bear trap is the inverse of a bull trap. It happens when a selling market suddenly becomes bullish, resulting in a soaring market price that is generally fleeting. The price surge draws many purchasers into the market, but before they can earn a large profit, the price reverses and continues to fall.
Bull and bear traps are misleading reversal indications that may cause significant losses if not handled correctly.
How Bear and Bull Traps Work
These traps are crypto market manipulations perpetrated by traders with substantial amounts of a coin.
Collective selling (in the case of a bear trap) or purchasing (in the case of a bull trap) of a specific token changes the price, causing it to briefly shift in the opposite direction. Some investors who feel the market is already shifting direction will be obliged to react to the market’s move and so get stuck during this brief move.
An Example of a Bear Trap
After we’ve defined what a bear market looks like, let’s take a brief look at a real-world example to better understand how it works.
According to the chart above, throughout the bullish trend, the price was pushed below the trend line (the support) to give the appearance that the support would be breached. The price rose again inside the same candlestick, continuing the bullish trend.
Impatient traders would have pounced into the trade as soon as it breached the trend line, trapping themselves. Traders who waited for the candlestick to shut outside the trend line and retest would not have had the chance to execute a trade, saving them from being bear-trapped.
A Bull Trap Has a Similar Pattern in the Opposite Direction
A bull trap is often distinguished by an initial downtrend, i.e., a price decrease, followed by a false comeback, which is generally feeble. The price then falls further, forming a new low after the bounce. Traders that fall into these traps tend to purchase too soon.
4 Ways To Avoid Bull and Bear Traps
Now that you understand how these traps operate, let’s look at some practical approaches to prevent or at least mitigate them.
1. Check the Trade Volume
Checking the impacted asset’s transaction volume might help you discover and avoid bull and bear traps. When there is a reversal, for example, there should be a significant rise in volume since many traders and trade orders are generally engaged in the process. However, if you detect a reversal without a notable rise in volume, the price shift may not stay and be a trap.
Look for candlestick volume that is more than the typical volume. A low-volume breakout with an uncertain candlestick might indicate a fake breakout.
2. Look for Confirmation
You will lose money if you are one of those that enters trades at the first sign of a market movement.
One of the characteristics of a competent trader is patience. As a result, when a breakout occurs, traders often hunt for confirming signs by examining several technical indicators to determine if bearish or bullish momentum is genuinely increasing. The Relative Strength Index, Average True Range, Bollinger Bands, and Moving Averages, among other indicators, may be used to validate this.
The market does not always respond in the manner you expect. However, employing several technical tools to validate trade entry can assist you in minimizing losses.
3. Wait for a Retest
When a rapid bullish move breaks a barrier, it is best to wait for a retest and give it some higher momentum before placing buy orders. Similarly, before launching a trade, let a quick selling move to break the support, retest the resistance, and continue the negative trend.
Many traders see the breakout and retest approach as a dependable trading strategy. To employ this strategy successfully, you must first grasp how support and resistance function.
4. Always Use Stop-Loss Orders
A stop-loss order stops a lost transaction when the price hits a certain level. It is intended to minimize your loss in the case of an adverse market occurrence.
If you get into a bull or bear trap, using a stop loss can assist you reduce your loss. To get the most out of stop loss orders, you must get used to utilizing them on every transaction. A stop loss will always keep your losses in control, preventing you from losing more than you can afford.
The Measures Don’t Work in Isolation
We propose using the tactics discussed above to successfully minimize the negative impact that bear and bull traps may have on your trading balance. None of them can function properly on their own.
There have been instances of low trading volume at the start of a reversal that turned out to be a true reversal. Furthermore, some fake breakouts might linger for a long time (depending on the period you trade in), leading you to believe it is a true turnaround.
Overall, utilize a stop loss since it will help you predict the magnitude of your loss (if one occurs) and keep you in control of your trading balance.
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