What is a Bull Trap?
Bull The bull trap is a false signal in specialized analysis and trading. This trap occurs when in the downtrend of a stock, index, or digital currency. The price tendency changes for a while and persuades market participants that the uptrend has begun. But the trend is inverted and breaks the prior support level downwards. This price shifting traps traders and investors and hurts individuals who have taken long positions. The cow trap may also be referred to as the “whip pattern”. The opposite of a bull trap is a bear trap called a, and it is said that in an uptrend, prices fall for a while and then return to the original uptrend. In the following article, you will learn more about this concept on the Investopedia website.
What is a cow trap and what does it mean?
As mentioned, a bull trap transpires when a trader or investor buys a stock or a pair that has broken a resistance level. Thinking that the downtrend is over. This is very common in orthodox technical-oriented strategies; But unlike many cases where the analysis works well, in cattle traps the price changes direction again and continues the previous downward trend. In this way, traders are trapped and affected 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 awareness 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 the opposition is broken. But the volume of exchanges is not sufficient, or uncertain candlestick patterns such as the “Dodge Star” are seen in the graph, there is a possibility of a cow trap.
Why does a cow trap happen?
From a psychological point of view, a bull trap ensues when buyers are unable to support the uptrend with strength after the break of the upward resistance zone. This inability to support the trend may be due to a reduction in the size and strength of the price movement. Vendors, meanwhile, take advantage of the opportunity to sell their assets when they see a divergence. The price pulls back to the previous opposition and breaks it downwards. And this causes the customers’ loss limit to be activated and the price to fall sharply.
What to do in dealing with cow traps?
The best way to deal with cow traps is to recognize the warning signs before they happen. As mentioned, declining trading volume is one of these symptoms. In such a situation where there is a possibility of a cow trap. The trader should withdraw from the trade as soon as possible. In such cases, setting a loss limit in an exchange can be useful, especially in situations where the market can make emotional decisions.
An example of a cow trap
In this example, during a severe sell-off, the stock price falls rapidly, recording a new annual price floor. Then the price recovers quickly and breaks the resistance area of the trend line upwards. Many traders and investors buy assets with the prediction. That the resistance is gone. But the price immediately fell sharply and continued its downward trend. Buyers who have taken a long position in the previous two candlesticks will suffer heavy losses unless they have implemented risk management techniques.
To avoid getting caught in a trap, the trader must wait for strong confirmations and after getting these confirmations, enter the trade or set a loss limit very close to the support line and slightly below this line.
Source : https://arzdigital.com/bull-trap/
