bulltrap

What Is a Bull Trap?

A bull trap is a false signal, referring vĩ đại a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior tư vấn level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions. A bull trap may also refer vĩ đại a whipsaw pattern.

The opposite of a bull trap is a bear trap, which occurs when sellers fail vĩ đại press a decline below a breakdown level.

Bạn đang xem: bulltrap

Understanding a Bull Trap

A bull trap occurs when a trader or investor buys a security that breaks out above a resistance level—a common technical analysis-based strategy. While many breakouts are followed by strong moves higher, the security may quickly reverse direction. These are known as "bull traps" because traders and investors who bought the breakout are "trapped" in the trade.

Traders and investors can avoid bull traps by looking for confirmations following a breakout. For example, a trader may look for higher than thở average volume and bullish candlesticks following a breakout vĩ đại confirm that price is likely vĩ đại move higher. A breakout that generates low volume and indecisive candlesticks—such as a doji star—could be a sign of a bull trap.

Xem thêm: mau xuyên bệnh kiều nam chủ hắn lại ghen tị

From a psychological standpoint, bull traps occur when bulls fail vĩ đại tư vấn a rally above a breakout level, which could be due vĩ đại a lack of momentum and/or profit-taking. Bears may jump on the opportunity vĩ đại sell the security if they see divergences, dropping prices below resistance levels, which can then trigger stop-loss orders.

Xem thêm: yêu quái nhỏ

The best way vĩ đại handle bull traps is vĩ đại recognize warning signs ahead of time, such as low volume breakouts, and exit the trade as quickly as possible if a bull trap is suspected. Stop-loss orders can be helpful in these circumstances, especially if the market is moving quickly, vĩ đại avoid letting emotion drive decision-making.

Example of a Bull Trap

In this example, the security sells off and hits a new 52-week low before rebounding sharply on high volume and lifting into trendline resistance. Many traders and investors jump on vĩ đại the move, anticipating a breakout above trendline resistance but the security reverses at resistance and turns sharply lower from these levels. New bulls get trapped in long trades and incur rapid losses, unless aggressive risk management techniques are undertaken.

The trader or investor could have avoided the bull trap by waiting for a breakout vĩ đại unfold before purchasing the security, or at least mitigated losses by setting a tight stop-loss order just below the breakout level.