Capital markets like bitcoin, stocks, and forex are full of pitfalls designed to focus on retail traders who are naive and emotional. Bear traps and Bull traps are two of the most popular kinds of traps related to cryptocurrency trading. Read ON!
In this article, to become a smarter and more efficient cryptocurrency investor, you can learn how to find and work around those traps. An easy way to avoid these traps is by Bitcoin pro.
What is a bear trap?
A bear trap is a sudden decline in an uptrend in stocks.
Bear traps often crack local market supports before quickly flipping to the upside, and allow traders to open short positions after losing primary support.
Price rockets back up after the trapping process leaving bears in a poor deal.
What is a bull trap?
A bull trap is a rapid downward trend in markets.
A bull trap, like its bear equivalent, gives you a misleading impression of market reversal. A bull trap is intended in this case to trick naive traders into opening long positions on an asset.
Price continues downward after the trapping phase, and bulls become stuck.
Now that you simply know what bear and bull traps look like, here are a few tips on how to stop being caught in a trapped deal.
Bull Trap Underway:
Bitcoin's price has seen some small retracements here and there, but it seems poised to target at $8k and possibly higher than that at $8.4k-$9k to fill the CME Futures void halfway in the aftermath of Bitcoin. We would again see a considerable amount of retail bulls getting too excited, and this time they could be heading into the enormous bull trap in the history of Bitcoin. While we know that BTC / USD is printing a big bear flag that is very likely to lead to a considerable fall in the weeks and months ahead, we do know that certain circumstances could be different this time.
The stock market was starting its biggest uptrends when Bitcoin came into being in 2009. The uptrend continues till now, and Bitcoin has had uptrends and bear cycles over this period, but both the stock market and Bitcoin have become bull markets throughout the long term. This will be the first time since the financial crisis of 2008-09 that the S&P 500 (SPX) has entered a bear market. Therefore for Bitcoin, this may be the primary bear market of its entire history. This will act as a clear message to the excessively optimistic Bitcoin traders. They are pouring their money into cryptocurrencies, believing that because of halving, the market is going to recover.
We've seen several times how significant downtrends in the stock market have led to the same in the cryptocurrency market. Yet plenty of crypto fans continue to deny the Bitcoin and the financial stock market connect. For now, it is much easier for them to disregard the connection when halving nears, but they will find out the hard way. The Dollar Currency Index (DXY) appears to be on an uptrend. When we see this year's U.S .- Iran battle, which is likely particularly if the Coronavirus situation ends up damaging the approval ratings of President Trump, it would grow even higher, and WTI Crude Oil (USOil) could also launch an uptrend at around the same time. This would be disastrous for the stock market, but for the crypto-currency industry, it would be much worse.
How to Avoid the Bull Trap?
1. Avoid Late Entries
A long sustained uptrend is typically a possible indication of the deceptive pattern from the descriptions of a bull trap. In short, the longer an uptrend has moved, the higher the probability that a trap will develop.
That said; By keeping clear of late entries, a trader will escape bull traps. When for a time considered "too long" a pattern has been going, then it is best not to sell it.
Keen traders, both buyers, and sellers realize that during pullbacks, sloppy traders come in and add trades. They then lie in wait and tempt them when they least expect it, reversing the patterns.
2. Don't Buy at Resistance Levels
One of the foremost sung melodies in the trading world is, "Trade with the Trend." There's no easier thanks to do that than purchasing at support rates and selling in resistance areas.
If this definition needs to be upheld, then a trader should never attempt to buy trades at resistance rates. Nonetheless, there are exceptions, such as if the price retests the zone after it breaks and confirms the start of a fresh cycle.
Even so, buying trades at a resistance level is riskier than investing in support zones.
3. Wait for Retests
There is no established law that it is wrong to buy on resistance-zones-turned-support. Traders realize that when damaged, a support zone is a field of resistance. In the same way, the resistance zone, when broken, becomes a support zone.
In a nutshell, the trader should always wait for the price not only to break the resistance zone but also to retest it and gain momentum before their purchase orders are executed.
Buying at the retest means that the trade is much lower than one placed at the top of the breaking candle. Therefore, in case the exchange is a failure, less money will be wasted.
4. Observe Price Action
Through watching price action, the traders can avoid bull traps. Price action applies to the market's actual behavior at any given time.
Now, watching a bull rally reach a degree of resistance, the trader will be keen to remember what the price is. For instance:
- When the price hits a resistance zone, shorter candlesticks start to form. There is no volume nor momentum to sustain trading at this time.
- If longer bearish candles are produced, complemented by short bullish candles, this means that bears are taking over the direction of the market. Don't buy trades.
- If the candlesticks on the upper side of the resistance zone have long wicks, this means that the bears prevent the price from going any higher. If buy trades are available here, they'll only benefit for a short time before being pulled down and trapped.
In short, price action is the best way to read the market and avoid bull traps as they emerge.
Bull trap trends are known to allow traders to engage in risky trades that almost always result in losses. As such, when they hear the sentence being said, many traders shiver. However, they can become lucrative setups by knowing how bull traps develop and what they mean. In this article, we saw how to recognize and even trade bull traps while reducing the risks and optimizing the profits.