As a trader, you’re always looking for opportunities to make money. But sometimes, you can find yourself in a situation where it seems like you can’t lose – only to end up losing everything. This is known as a bull trap, and it’s something that every trader needs to be aware of. In this post, we’ll discuss how to identify one and avoid getting caught in one.
Make Use of Indicators When Trading
One of the best ways to ensure that you don’t get caught in a bull trap is by using your indicators. Many traders use moving averages and oscillators to determine where they should enter and exit trades. They’ll often find that their indicators point out several different entries and exit points, one of which will stand out as the most likely to yield a win. By using this method, traders can often avoid getting caught in bull traps, as they’ll be able to stay out of the market until it does start trending in their direction.
Check Candlestick Patterns
Another good way to avoid bull traps is to look at the type of candlestick patterns forming. While it’s true that many candlestick patterns can be used for both identification and confirmation, some tend to be more effective than others when it comes to determining whether or not you should get in on a trade.
Bearish engulfing patterns, for example, are often used to indicate that the market is about to continue in its current direction. While this doesn’t mean you should avoid getting in on a trade, it does mean that it’s not likely to go up anytime soon (at least according to the pattern). This makes bearish engulfing patterns an effective way of knowing when to stay out of the market.
Don’t Get Caught Up in the Hype
The cryptocurrency industry is filled with hype. And while it’s true that sometimes, all that hype can give you a hint at where the market might be going (especially if most of the cryptocurrency community seems excited about it), this isn’t always the case. More often than not, those who have the most to gain from a bull trap are those who have been pumping their coin for a while with no sign of stopping. These people know that eventually, they will make a large profit if they can convince enough people to invest in their coins. And once someone else is selling and they decide it’s time to sell as well, the prices drop sharply, and everyone who got in late gets screwed.
Don’t Rush into a Trade.
It’s important to remember that just because you have an indicator pointing out a potential trade doesn’t mean you should rush into it right away. This is one of the biggest mistakes you can make as a trader. Indicators can be wrong, and you shouldn’t trust them completely. Instead, it’s important to wait for confirmation signals before getting in on any trade. This is why many traders use multiple indicators – one isn’t enough evidence that the market is going their way.
Analyze Chart Patterns
One of the simplest ways to determine whether or not coins are in bull traps is by looking at its chart pattern. Bull traps are often formed shortly after a long period of decline, which will cause many traders to assume that it’s time for the market to recover. But as we mentioned before, this isn’t always the case.
Instead, it’s often just a bear trap in disguise, and traders who get caught in it will end up losing money. By analyzing the chart pattern of the coin in question, you can determine whether or not there are bull traps soon after its decline.
Check the Trading Volume
One of the best ways to know whether or not bull traps are forming around a particular coin is by looking at its trading volume. If there isn’t enough volume for the sell-off, likely, people who got in early and sold are just trying to scare everyone else into selling as well. The lack of volume means that those people don’t have enough money to push the prices down significantly.
However, if there is a lot of volume for this sell-off, the market will likely continue in this direction for quite some time. The more selling people means that those who bought at or near the top are looking to cut their losses and get out as quickly as possible.
Confirm Signals with a Variety of Indicators
As mentioned before, you shouldn’t trust signals completely. Instead, it’s important to wait for more confirmation before selling or buying into a market. This makes it easier for you to determine whether or not there are bull traps following this decline.
One of the most effective ways of confirming your indicator is by looking at the coin’s market cap in question. For example, if you are looking at a cryptocurrency with a high market cap and significant selling volume, causing its price to drop significantly, this will likely continue long-term.
The best way to confirm your indicator is by using more than one indicator. By doing this, you should have a lot more information to go before deciding on where to trade. For example, using both Bollinger Bands and a Fibonacci retracement level can provide a significant amount of evidence as to whether or not there is likely going to be a bull trap soon after the price falls.
If you are new to trading, it’s easy to get excited when your indicator tells you that the market is going in the direction you want. However, this excitement can often cause traders to make bad decisions when they should be looking out for bull traps. By following some simple guidelines in this article, you’ll know how to determine whether or not bull traps are likely around the corner.