What is a bull trap and how to identify it?
Here's how to spot a bull trap with some indicators that you're on your way:
RSI DivergenceA high RSI can be an indication of a potential bullish or bearish trap.
A Relative Strength Index (RSI) calculation can be used to identify a possible bullish or bearish trap. The RSI is a technical indicator that can help determine if a cryptocurrency stock or asset is overbought, underbought, or neither.
RSI follows this formula:
The calculation typically covers 14 days, although it can also be applied to other timeframes. The period has no consequence in the calculation since it is removed in the formula.
In the case of a probable bullish trap, a high RSI and overbought circumstances suggest that the selling pressure is increasing. Traders are eager to pocket their winnings and will most likely close the trade at any time. Therefore, the first breakout and uptrend may not be an indication of continued price increases.
Lack of volume boostWhen the market is really up, there should be a noticeable increase in volume as more people buy the stock as it recovers.
If there is little or no increase in volume on the breakout, it is a sign that there is not much interest in the stock at that price and that the rally may not be sustainable.
Rising prices without a significant increase can also likely be due to bots and retail traders vying for position.
Lack of momentumWhen a stock experiences a sharp decline or gap down with huge red candles but then rebounds very softly, it is a sign of a bullish trap.
The natural tendency of the market is to move in cycles. When it reaches the top of a cycle, it is usually a period of consolidation as bulls and bears compete for control.
This lack of momentum can be seen as a harbinger of a market reversal.
No trend breakA price drop is indicated by a sequence of lower lows and lower highs.
Stock price trends don't always change when advances are made. A downtrend is still intact as long as the price rise does not move above the most recent low high.
Lack of confirmation is one of the most common mistakes made by those caught in bull traps. They should already suspect that if the current high does not go above the previous high, then it is in a downtrend or range.
This is generally considered "no man's land", one of the worst places to start a purchase, unless you have a good reason to do so.
Although some traders may be disappointed by this, most would be better off waiting for confirmation and buying at a higher price than trying to "get in early" and be trapped.
New resistance level testThe first indication that a bullish trap is approaching is strong bullish momentum sustained for a long time, but reacting quickly to a particular resistance area.
When a stock has established itself as a strong uptrend with little downside pressure, it implies buyers are flooding all their resources.
However, when they reach a level of resistance that they don't want to break through or are afraid to break through, the price usually reverses before going even higher. Oddly Huge Bullish Candlestick
In the last leg of the trap, a huge bullish candle usually occupies most of the immediate left candlesticks.
This is usually a last ditch effort by the bulls to gain control of the market before the price reverses. This can also happen for several other reasons:
Big players intentionally push the price higher to attract unsuspecting buyers. New investors are convinced that a breakout has occurred and start buying again. The sellers intentionally let the buyers dominate the market for a short time, allowing sell limit orders to be accepted above the resistance zone. Constitution of a rangeThe final characteristic of a bull trap arrangement is that it creates a range-like pattern at the resistance level.
The price of an asset is said to bounce between a support and resistance level when it fluctuates in a run...
Here's how to spot a bull trap with some indicators that you're on your way:
RSI DivergenceA high RSI can be an indication of a potential bullish or bearish trap.
A Relative Strength Index (RSI) calculation can be used to identify a possible bullish or bearish trap. The RSI is a technical indicator that can help determine if a cryptocurrency stock or asset is overbought, underbought, or neither.
RSI follows this formula:
The calculation typically covers 14 days, although it can also be applied to other timeframes. The period has no consequence in the calculation since it is removed in the formula.
In the case of a probable bullish trap, a high RSI and overbought circumstances suggest that the selling pressure is increasing. Traders are eager to pocket their winnings and will most likely close the trade at any time. Therefore, the first breakout and uptrend may not be an indication of continued price increases.
Lack of volume boostWhen the market is really up, there should be a noticeable increase in volume as more people buy the stock as it recovers.
If there is little or no increase in volume on the breakout, it is a sign that there is not much interest in the stock at that price and that the rally may not be sustainable.
Rising prices without a significant increase can also likely be due to bots and retail traders vying for position.
Lack of momentumWhen a stock experiences a sharp decline or gap down with huge red candles but then rebounds very softly, it is a sign of a bullish trap.
The natural tendency of the market is to move in cycles. When it reaches the top of a cycle, it is usually a period of consolidation as bulls and bears compete for control.
This lack of momentum can be seen as a harbinger of a market reversal.
No trend breakA price drop is indicated by a sequence of lower lows and lower highs.
Stock price trends don't always change when advances are made. A downtrend is still intact as long as the price rise does not move above the most recent low high.
Lack of confirmation is one of the most common mistakes made by those caught in bull traps. They should already suspect that if the current high does not go above the previous high, then it is in a downtrend or range.
This is generally considered "no man's land", one of the worst places to start a purchase, unless you have a good reason to do so.
Although some traders may be disappointed by this, most would be better off waiting for confirmation and buying at a higher price than trying to "get in early" and be trapped.
New resistance level testThe first indication that a bullish trap is approaching is strong bullish momentum sustained for a long time, but reacting quickly to a particular resistance area.
When a stock has established itself as a strong uptrend with little downside pressure, it implies buyers are flooding all their resources.
However, when they reach a level of resistance that they don't want to break through or are afraid to break through, the price usually reverses before going even higher. Oddly Huge Bullish Candlestick
In the last leg of the trap, a huge bullish candle usually occupies most of the immediate left candlesticks.
This is usually a last ditch effort by the bulls to gain control of the market before the price reverses. This can also happen for several other reasons:
Big players intentionally push the price higher to attract unsuspecting buyers. New investors are convinced that a breakout has occurred and start buying again. The sellers intentionally let the buyers dominate the market for a short time, allowing sell limit orders to be accepted above the resistance zone. Constitution of a rangeThe final characteristic of a bull trap arrangement is that it creates a range-like pattern at the resistance level.
The price of an asset is said to bounce between a support and resistance level when it fluctuates in a run...
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