Bull Trap

A Bull Trap is a false bullish signal in a bearish trending market. This sudden rise convinces investors that the asset is entering a bullish phase (characterised by a positive trend), prompting them to open positions. However, after a brief rise, the market rebounds in a bearish trend, ‘trapping’ investors who were hoping to profit. It is no coincidence that the term Bull Trap refers precisely to the Bull Market, a financial market characterised by a strong positive trend.

Bull Traps are one of the biggest pitfalls in trading, and can occur within any financial environment.

The other side of the coin of the Bull Trap is the Bear Trap, which takes its name from the Bear Market. The substantial difference between Bear Traps and Bull Traps lies in the trend of the market under consideration and the false signal. In a Bear Trap, the market in a bullish phase undergoes a temporary reversal of the trend that leads investors to close a position, causing them to lose potential profits.

How can you recognise a Bull Trap? There is no foolproof method, but in general it is important to carry out a careful technical analysis of the market and learn from past bull traps.

Bull Traps sometimes present a recurring pattern. Before entering a market, you should carefully evaluate the associated trading volume. Trading volume is a very useful figure in financial markets as it is the sum of all quantities of an asset sold and bought in a certain period of time. When an asset is actually in a bullish phase, institutional or expert investors are more likely to enter the market in a timely manner, consequently leading to an increase in trading volume. If, on the other hand, volumes remain unchanged or change little during a price rise, this could be a bull trap.  

If you are still uncertain about whether or not a Bull Trap has occurred, you can look at another indicator: momentum. This value analyses the change in a market’s prices over a certain time frame and helps to determine which trend it might follow in the future. Simply put, it is a technical indicator that helps us understand whether an asset will continue to rise or fall. This means that if the price of an asset starts to rise but the momentum value remains unchanged, we could be facing a bull trap. Usually, in a bullish trend, the value of the momentum indicators rises along with the price.

There are various other technical analysis tools that may or may not confirm the presence of a Bull Trap. In general, the golden rule for all investors to avoid a Bull Trap is not to get carried away by your emotions. If the value of an asset suddenly rises, it is essential to analyse the market with a clear head, without getting caught up in FOMO (Fear of Missing Out) and taking hasty actions. 

Correlated words

Mutual Funds

Mutual funds are financial instruments that combine the capital of several investors into a single asset.

Bear Trap

A Bear Trap is a bearish movement in a bullish market that confuses investors.

Volatility

In economics, volatility indicates the variation of the price of a financial instrument through time.

Supply and demand

In economics, supply and demand correspond to the two main market variables and describe the behaviour of those who buy and sell goods or services.

Volume

The amount of currency traded in a given period.

Market Trend

A perceived tendency of financial markets to move in a particular direction over time.

Trading

Trading is a speculative activity of buying and selling financial assets, with the goal of making a profit.

Stop Order

A trading order that allows you to set a price at which another order is triggered.

Slippage

The difference between the execution price of an order and the price entered in the order.

Support and resistance

Support and resistance are two technical analysis tools used to monitor the price trend of an asset.

ROI

A value that measures the return generated by an investment.

Pump&Dump

A strategy that inflates the price of a cryptocurrency to generate profits only for those who implement it.

Prediction Market

Exchange-traded markets created for the purpose of trading the outcome of events.

Order Book

The list of all the prices at which traders are willing to trade a certain amount of cryptocurrency on an exchange.

Oracle

A service that collects data not available on blockchain, verifies it and provides it to smart contracts

Moon

When the price of a cryptocurrency rises very fast, they say it soars 'to the moon'.

Market Order

Instant buy or sell at the next best price available on the market.

Market Maker

Companies or organised entities that, in partnership with an exchange, are always willing to buy and sell a cryptocurrency.

Market Cap

The total value of all the coins or tokens of a cryptocurrency in circulation.

Limit Order

A buy or sell order that is executed only when the cryptocurrency reaches the set price.

Futures Contract

A contract that regulates the execution of a transaction at a predetermined price on a specific date.

FUD

Fear, Uncertainty and Doubt refers to a negative market sentiment

Circulating Supply

The number of units of a cryptocurrency available on the market.

Forex

The Foreign Exchange Market allows fiat currency trading.

FOMO

Fear Of Missing Out is an expression often used in the context of trading and cryptocurrencies.

ETF

ETFs are passively managed investment funds that replicate the value of a reference index called a benchmark.

Buy Wall and Sell Wall

High number of purchases or sales demanded at a certain price.

Bull Market

A market where there is an upward price trend

Break-Even point

The balance point between losses and gains, income and expenditure.

Bid and Ask

Supply and demand on a cryptocurrency exchange.

Benchmark

A standard for measuring the performance of a financial instrument or market.

Bear Market

A market phase characterised by price lows.

ATH and ATL

Acronyms used to indicate the maximum and minimum price of a cryptocurrency.

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