WHAT IS A BULL TRAPA Bull Trap occurs when there is a quick price increase in a downtrend. The false signal will show the asset’s (cryptoccureny or index) downtrend reversing its direction in expectation that trend will meet or breakout above the resistance level. During its sudden incline trend, investors or traders would often be lured to buy or open long on the asset, anticipating for the breakout. However, the trend reverses again after a short period of time and exposes that the value of the cryptocurrency/index is continuing to decline. Unfortunately for the bullish traders and investors, they are trapped in the trade and experience losses as a result.
WHAT IS A BEAR TRAPA Bear Trap occurs when there is a quick price decrease in an uptrend. The false signal will show the asset’s (cryptoccureny or index) uptrend reversing its direction towards a downtrend. This entices traders to want to quickly close their positions to avoid further loses. Some would quickly open short positions in hope that they would make profit from the decline in value, when in fact the trend suddenly reverses again and continues to incline.
CAUSES OF BULL TRAPS OR BEAR TRAPSAccording to Perfect Trend System, there is no specific and clear evidence that claims a certain action in the market could result in bull and bear traps. What we can evidently pick up from is that there is a pattern in when these events occur. For example, bull trap is commonly expected near the tip of an uptrend while the bear trap is near the bottom of the downtrend. Perfect Trend System has also noted that the rapid price action could be affected by the traps themselves. The influence they have on people’s market actions and behaviors could build further momentum for future bull and bear traps to occur again.
6 WAYS TO AVOID BULL TRAPS AND BEAR TRAPSWhether you are a professional or a new trader, you can practice the following habits to avoid falling into the bull or bear traps.
- Check the Volume
- Look for RSI divergence
Source: Tradingview Chart with RSI (www.testnet.bitorb.com)In the BitOrb exchange, traders can place orders based on the RSI indicators. You can create conditional orders using the Orchestrator for when you feel RSI becomes oversold and automatically open long positions.
Source: The Orchestrator (www.testnet.bitorb.com)
- Check the news
- Use stop-loss orders
- Trade only in the direction of the main trend
- Check the next few candlesticks after breakout