What are bull and bear traps?

What is a bull trap?

A bull trap is a short uptrend in a long downtrend. Often, the price of an asset starts to rise unexpectedly, provoking traders to bet on a possible market reversal. But the result is just the opposite: the decline continues, and investors are forced to urgently sell the purchased assets in the hope of avoiding serious losses.

How does a bull trap work?

A bull trap appears in a bear market as an artificially created situation by sellers or a positive reaction of traders to certain news. Regardless of the underlying cause, the process follows the same pattern:

• traders show interest in the asset, and predict a further increase in its market value;
• due to an increase in demand, the asset price breaks through the resistance level;
• if investors are unable to maintain an uptrend, the trap closes, and the market value of the asset continues to move downward.

Who falls victim to the bull trap?

Most often, investors who fall into the following categories suffer losses:

• Highly emotional traders. They react to any market fluctuations, even the smallest ones, taking them as trend reversals and buy signals. Often they create their own theories that explain the market dynamics and are guided by them, brushing aside common sense;
• Inexperienced traders. Due to a lack of basic knowledge and skills, newbies aren’t able to assess the true market situation. They do not always correctly interpret changes and face losses due to a lack of practice and technical analysis tools.  

What is a bear trap?

A bear trap is the opposite of a bull trap, a market situation in which the price of an asset shows a false short-term reversal from an uptrend to a downtrend. A sharp drop in value is perceived by some traders as a signal to urgently sell cryptocurrencies. But the asset eventually continues to grow, and this means that the spontaneous desire to earn or avoid losses played a cruel joke on the investor.

Why does a bear trap occur?

The trap is formed against the backdrop of an uptrend and has the following mechanism:

• the token begins to be massively sold, which can be caused both by the reaction to the news and by the manipulations of larger investors;
• the support line is broken and the sales volume further increases;
• the trap closes, and the asset’s market price continues the previous uptrend.

Who falls into the bear trap?

In this case, the funds are lost by impulsive traders who, immediately after breaking through the support line, decide to sell assets.

I don't want to fall into the trap! What should I do?

Knowing the traps’ basics, you can make a list of tools that will help you to avoid them.

1. Stop-loss orders. Always use them when trading in unstable conditions. Due to the automatic closing of losing trades, a stop loss will protect you from serious losses in case of unforeseen situations.
2. Confirmation signals and retesting. To prevent the market from “deceiving” you, use technical analysis tools. Indicators, including RSI, Bollinger Bands, and others, will help you understand if the trend has really changed or if the signals are false.
3. Checking trading volume. If there is no significant change in volume, most likely, we are talking about a trap. A true reversal is accompanied by a significant increase in trading volume due to a large number of traders.

Conclusion

Bull and bear traps are frequent crypto market guests. Take your time with decisions and use technical analysis tools so as not to lose funds due to false signals.