What Is A Bull Trap?

Did you think you where smart and tried to front run a break out only to get slapped in the face by bearish resistance? Well most likely you got caught in a bull trap!

In this post, I will discuss what a bull trap is, how to spot it, and how to try your best to avoid it.

What is a bull trap?

Well, according to Investopedia:

A bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions. A bull trap may also refer to a whipsaw pattern.

Basically it is a fake out by the bears. They let you as a bull have some upside movement, like showing candy to a kid, luring you into their bearish, bloody paws! Once you decide you are feeling good and going for the entry, that's when they have you!

How to spot a trap

Well sometimes it is extremely hard to spot if you are not looking at all the right angles. If you are looking at short term movements and not zooming out to a much larger viewpoint, you can easily get trapped, or faked out! Like I said before, this comes when you are looking at what can be a positive momentum move, in which you think is going to continue. But then just as you buy in, as it always happens to the best traders, you get completely rejected at a previous level of resistance, the very level that you thought the price was going to break through.

Let's look at an example

When you get caught in a trap that results in losses, it's usually when indicators are starting to look like they are turning to the upside. Things are looking pretty good... You may decide you want to front run this possible breakout...

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And then...resistance starts to form...You think we can still punch through...

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And here comes the trap...

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This is when the blood is shed and most likely, what you thought was a good entry is now most likely in the red and if you were smart and set a stop loss, well, it could be getting stopped out at this point. If not.. I hope you can handle some more downside...

The biggest lesson is to really watch for volume as well as the other indications. The volume can really show you how much interest is in the market. When to spot these traps is when volume starts getting weak and the candles start getting thinner and thinner, this is a sign of things may be turning around. And don't forget, zoom out! You can see so much from a broader overview.

What to do if you get caught in a bull trap

Well, really the best thing to do with any trade is to go into it with a plan. Make sure you are setting stop losses in case things like this happen. Trading volatile assets like crypto can be difficult, especially in a 24 hour a day 365 day a year market. Don't get discouraged if you miss a move or get stopped out of a trade, there will always be another one to catch.

The biggest thing to record your trades so that you can see what you are doing wrong, learn from your mistakes, and take those lessons into the next trade. All you can do is take the data as it comes, and learn to make adjustments. Try leaving emotions out of it at all possible... Which I know you are saying, yeah right, lol! But it's the biggest hurtle a trader has to overcome, themselves.

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