Before every fluctuation in the foreign exchange market, warning signs often appear. Being able to recognize and take advantage of these opportunities will help investors achieve significant profits. However, not all signals are correct and Bull Trap is a typical example. So what is a bull trap? Forex trading strategies to avoid the bull trap? Please refer to the article below with Forex Trading to understand better.
Definition what is a bull trap?
“Bull trap” is a term combining “bull” and “trap”. Bull Trap refers to vague signals of price growth. Usually, these signals appear after a period of price decline. Making investors easily enticed and expecting a recovery. However, in reality, it is just a fake enticement, like a hacksaw model. Causing investors to fall into a state of buying at the peak. And face great risks when stock prices or the market continues to go down.
Bull traps are related to Dow theory. According to the concept what is dow theory, the market moves in three main trends: uptrend, downtrend, and horizontal trend. Bull traps often occur during the transition from a downtrend to an uptrend. When investors are confused and misunderstand a temporary price increase signals as a sign of market recovery.
See more: Learn Dow theory for trading beginners
What is a bull trap?
Bull Trap, also known as bull trap, is a false signal about the market. This causes investors to mistakenly believe that the downtrend has ended and the market is trending up. So what is the cause what is a bull trap?
Being manipulated by the “big guys”.
Large investors with seasoned finances and information are often called ‘sharks’ in the foreign exchange market. They often create fluctuations and influence the price of currencies. ‘Sharks’ often create investment fever by buying when prices are low. When the peak time comes, they begin to sell for profit, causing prices to fall. This often causes new, inexperienced investors to see the price increase and buy, falling into the ‘shark’ trap.
Unusual events or news
Statements or forecasts from politicians can have a big impact on the foreign exchange market. Any fluctuations on the global level can impact the foreign exchange market in UK. Causes ambiguity in the psychology of investors. This information often makes many investors believe that prices will increase. Leading them to buy into the currency, causing a temporary increase in price. However, soon after, the information may be edited. Events that do not have a strong impact can cause prices to turn around and decrease.
Because many investors “fish for the bottom”
After a recession, there may be temporary price increases in markets where supply and demand have been depleted. In the context of a sharp decline, many investors may wait to take advantage of the opportunity to buy at the lowest price. However, this could create upward pressure, pushing the price above the resistance level. However, the strength of this upward price trend is often not maintained for long. And the market may continue to adjust downward after that.
Learn how bull traps work
Bull traps often arise during periods of strong declines in the market or stocks. The basic nature of a bull trap is when a group of investors feels the stock price has fallen too far. And make a purchase hoping the bottom has come. However, the purchasing power of this group is not strong enough to cope with the selling pressure. This causes stock or market prices to continue to decline as purchasing power declines.
After the bull trap occurs, the group of investors who buy at the bottom often suffer losses and switch to cutting losses. Create stronger selling pressure. Therefore, prices often drop sharply after each bull trap.
What is a bull trap?
Bull traps can cause significant losses to investors if not identified promptly. Below are the most typical signs of a bull trap.
Bull traps often appear in support and resistance zones
Testing the price multiple times without being able to overcome the resistance level. Shows that the level of resistance is very strong, causing the pressure to increase and decrease. In this case, if the price breaks through the resistance level, it is unlikely to maintain the upward momentum. Therefore, when the price fluctuates within a certain range, resistance is encountered many times. The main trend is a strong decrease, which is definitely a Bull Trap that you need to avoid.
A long green reversal candlestick pattern appears
If you spot an unusually long green candle that breaks through the resistance level. Maybe it’s a sign that “sharks” are intervening in the market to entice investors to participate. When the price reaches the expected level, they will sell out simultaneously. As a result, the market will be pushed down immediately, causing investors to face the Bull Trap.
See more: Broker XM: Explore the world of Forex fingertips
Forex trading strategies to avoid bull traps
To avoid bull traps, you need to equip yourself with appropriate knowledge and trading strategies. In this section, we will share with you some effective Forex trading strategies to avoid bull traps.
Do not trade when the market has a Parabolic shape
When the market is pulled into a parabolic curve, the cause comes from the Fomo phenomenon. When investors are carried away by anxious emotions, they miss the opportunity and buy, pushing the price higher than the actual value. This form often changes quickly and is unstable because of its lack of sustainability. This makes it difficult for investors to evaluate price movements and set stop-loss orders.
Only do Breakout trades with Build Up
What is the strategy to avoid bull traps using Build up trading? Build Up is a type of market in which prices fluctuate strongly and are concentrated in the resistance zone. When participating in trading here, investors are guaranteed to be safer because the profit/loss ratio is quite favorable. Thanks to being able to place Stop loss orders easily.
The price range fluctuates strongly, showing that buyers are ready to buy at high prices. In the resistance zone, the longer it accumulates, the more investors place buy orders. Prices will continue to increase and bring profits as expected by investors.
In addition, investors can implement the following 5 preventative Forex trading strategies:
- Use an effective swing trading strategy. So do you know the strategy what is swing trading? Instead of relying only on short-term fluctuations, investors need to use technical analysis tools and methods to identify accurate trends.
- Limit buying stocks when the market is in a downtrend.
- Carefully observe recoveries to see if liquidity increases; If not, it could be a sign of a Bull Trap.
- Tighten risk management when investing in falling markets. If a stock in your portfolio starts to decline, cut your losses quickly.
Conclude
Hopefully, through this article, investors will have a deeper overview of what is a bull trap. From there, strengthen your knowledge of the market and financial analysis. It is worth noting that market prices often experience fluctuations due to the influence of large investors. Therefore, to invest safely and effectively, improve your knowledge and market analysis skills. Don’t forget to follow Forex Trading to learn more useful information about Forex trading strategies.
Frequently asked questions
How is a Bull Trap different from a real market recovery?
The Bull Trap differs from a real market recovery in that it is just a scam. While the market recovery is actually a long and stable trend.
How does the Bull Trap affect investors?
Bull Trap can cause huge losses for investors because they buy while the stock price is rising, but then the price drops sharply.
What is a bull trap?
Bull Trap can lead to many serious consequences for investors. When stock prices continue to decline after the Bull Trap, investors who buy in will lose money. Bull Trap can make investors and lose confidence in the market. Leading to making wrong investment decisions in the future.
When fooled by the Bull Trap, investors may miss the opportunity to invest in other potential stocks.
