What is a Bull Trap? Why should you be careful?

Bull Trap is a popular term in the securities industry. To effectively prevent falling into the Bull Trap, investors need to know the definition of the bull trap. And the characteristics and formation process of Bull Trap. Join Learn Forex Trading to learn those contents through the article below!

General understanding of bull trap? 

Bull Trap, also known as “bull market”. This is a common term in the securities industry. However, not all investors clearly understand it. The article below will explain the concept of a Bull Trap in stocks. Along with explaining the causes of Bull Trap and effective ways to avoid this trap.

Concept of bull trap?

Bull Trap, or “bull trap,” is a technical term in the stock market. It refers to a stock trading signal that appears to tell investors that the losing streak has ended and the market will turn upward.

However, this misunderstanding causes investors to expect stock growth and continue to buy. After the Bull Trap happened, the stock price suddenly turned down. This causes traders who bought in to face capital losses.

Bull Trap is often the opposite of Bear Trap (bearish trap). This is a bearish reversal signal in the context of an uptrend market. Bear Trap makes traders misunderstand that the market is bearish. It motivates them to place sell orders to catch the new trend.

Bull Trap and Bear Trap are both risks that investors can hardly avoid. Especially for new, inexperienced traders who do not have a strong mentality.

See more: What is a trader that becomes successful?

Causes of Bull Trap in Forex

After understanding the definition of Bull Trap, what causes the bull trap to appear? The following is specific information.

There are three main causes of Bull Trap:

• Manipulated by “sharks” (big traders): Big investors continuously buy a stock code to create a virtual price increase fever. During this period, inexperienced traders often notice price increases and decide to buy. When the expected threshold is reached, the “shark” begins to sell goods to make a profit.
• Unexpected events or news: When there is unexpected news, it is usually about unpredictable political issues. Investors will buy massively, causing a temporary price increase.
• Bullish effect: When many traders execute buy orders, this causes a bullish effect. However, this signal is only fake and temporary. Because the price will drop sharply when this buying process ends.

Characteristics of Bull Trap in Forex Trading

The most recognizable feature of the Bull Trap often appears at Pivot points. This is the resistance point or resistance level on the chart. When the statistical chart shows a double-top price pattern that resembles the letter M. This is a sign of a trend reversal from up to down.

• Phase 1: When the price rises and reaches the resistance level, there are two possible scenarios. Or the price continues to decrease if there is no leverage to increase the price. Or the price could break the resistance level and then increase slightly before gradually decreasing.
• Stage 2: A break-out phenomenon appears and investors begin to buy strongly.
• Stage 3: LO order (limit order) is issued to fill. It then loses momentum and the stock stops rising.
• Stage 4: The next stage is full of tension. When the price drops, some traders feel panic and close their long positions.
• Stage 5: The stock price drops to the stop-loss threshold, forcing traders to sell at a lower price. This is when the Bull Trap appeared, often considered a failed uprising. The seller still maintains the advantage when controlling the situation.

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What are the signs of a Bull Trap? 

To avoid bull trap, the most important thing is to recognize the signs of bull trap. Below is some information to help traders easily identify:

• Candle size: Often the stock price in a Bull Trap will create candles that are larger than the previous candle. Although this is not always 100% true. Because sometimes positive market signals can also increase candle size. However, the Bull Trap is still an important warning to consider. Investors should check other indicators to analyze this reversal.  

Candlestick charts are a technical analysis tool that traders often use to track price trends in the market. At the same time, it aims to determine the appropriate time to buy or sell stocks.

• Sideways Movement: When a stock price moves sideways during an uptrend. This could be a sign of the Bull Trap. This trend will usually end soon and the price will return to its correct level. Therefore, if the price is above the upper line of the horizontal trend, you need to be careful when deciding.
• Price breakout: The price breakout phenomenon occurs when the price increases sharply and breaks through a resistance area, creating a false bullish feeling.
• Double top pattern: If you see a double top pattern on the statistical chart that looks like the letter M. It is a warning signal of a trend reversal from bullish to bearish.

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How to effectively avoid Bull Trap in Forex investment 

Most investors (traders) have had at least one experience with the Bull Trap. Even though they participate in the trading market on a small or large scale. So, how to avoid a bull trap situation? Below are some strategies to prevent price increase traps that this article wants to share with you:

Equip yourself with forex knowledge about technical analysis

Bull Trap is simply a form of trap that exists in the field of stock and stock investment. To avoid bull traps and other fraudulent strategies in the stock market, you need to equip yourself with a solid knowledge of technical analysis. Technical analysis plays an important role in minimizing risk. This is also one of the most effective methods that investors can use. 

In addition, understanding what is free margin in forex will also help you increase your profits. At the same time, you can trade more effectively with a free margin.

Understand forex market trends

Even experienced traders can fall into the Bull Trap if they cannot control their personal feelings of fear. Besides understanding market psychology, investors need to have a clear view. It takes control of strategy and a willingness to remain resilient when stock prices fall.

See more: How to register ICMarkets broker account

Learn more from professional forex traders

Experienced investors often have valuable lessons. Therefore, learning from predecessors and seniors will help you save time. At the same time, it can help you minimize the risk of loss.

Besides, understanding what is hedging can also help you avoid unnecessary risks when trading forex.

What is the right stop loss to avoid the bull trap?

Despite having grasped and accumulated knowledge about risk scenarios in the stock market. Yet in difficult times, even experienced investors face the possibility of falling into traps. Then, to limit losses when encountering a price increase trap, take the following measures:

• Set a specific and tight stop loss point: Determine the stop loss point immediately when placing a buy order. Do not allow losses to exceed 10% in one trade.
• Stay calm and wait for confirmation signals from trading volume: Maintain a calm nature. Don’t go “all-in” on the market without confirmation from trading volume.
• Carefully analyze breakout patterns and strong candles: Focus on analyzing breakout patterns at resistance areas. It is necessary to ensure that the candle has sufficient strength.
• Wait for the confirmation candle after breaking the resistance zone: Wait until the next candle appears after breaking the resistance zone to ensure you avoid the Bull Trap.
• Research on trading volume and OBV indicators: Use information from trading volume or OBV indicators to increase your success rate.
• Avoid high leverage ratios: Avoid setting too high a leverage ratio to avoid the risk of burning your account.

Conclude

Through the above article, hopefully, you have a clearer view of the term bull trap and effective ways to overcome the rising price trap. Continue following Learn Forex Trading to discover more about other risk scenarios in stocks as well as investment strategies that bring high profits.

Frequently asked questions

How to identify Bull Traps?

To identify the Bull Trap, investors need to pay attention to the signs. Specifically, the M-shaped double-top price model, large candle size, and unstable price movement. Technical analysis, waiting for confirmation signals. Using other indicators such as trading volume are also useful means.

How to avoid the Bull Trap?

To avoid falling into the Bull Trap, investors can apply several strategies:

• Set a tight stop loss.
• Wait for confirmation signals from forex trading volume.
• Carefully analyze breakout patterns and strong candles.
• Research the total forex trading volume or the OBV indicator.

How are Bull Traps and Bear Traps different?

Bull Trap is when the market creates a false bullish impression. A Bear Trap creates the impression of price reduction to attract investors into the market before reversing and increasing prices.