What Is 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 average volume and bullish candlesticks following a breakout to confirm that price is likely to move higher. A breakout that generates low volume and indecisive candlesticks—such as a doji star—could be a sign of a bull trap.
From a psychological standpoint, bull traps occur when bulls fail to support a rally above a breakout level, which could be due to a lack of momentum and/or profit-taking. Bears may jump on the opportunity to sell the security if they see divergences, dropping prices below resistance levels, which can then trigger stop-loss orders.
The best way to handle bull traps is to 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, to avoid letting emotion drive decision-making.
Bull Trap Prediction
In a new strategy session, crypto strategist Nicholas Merten tells his 511,000 YouTube subscribers that Bitcoin is likely to drop lower in price, resulting in a bull trap for traders that just went long on BTC’s recent bullish price action.
He warns that Bitcoin has yet to trade and hold support above the 200-week moving average, signaling a liquidity trap is forming at current prices.
“Instead of just waiting for price to remain above the 200-week and find support there, people are already going ahead and chasing it. Where have we seen this before? It’s exactly what happens, the same exact supply zone or resistance range that we found ourselves in back in August, just maybe slightly higher to get people enticed, to get people excited, breaking above the price action in August, breaking slightly above that 200-week a couple of times, and not being able to actually formulate support.
But again, the investors aren’t waiting for it. They are not waiting for that 200-week support. They’re going ahead and buying in right now. And that’s the big mistake that everyone’s making because that is a liquidity trap, Classic 101 example of how market investors or more specifically institutional investors can trick retail traders and take advantage of that output side pressure in order to serve as exit liquidity for positions.”
Merten acknowledges his previous estimates of Bitcoin dipping as low as $10,000 or $12,000 may never come to pass. But he predicts Bitcoin could dip to $16,000, a 32.5% decline from its current price. Bitcoin is worth $23,717 at time of writing.
“I understand there’s a lot of optimism getting through that 200-day. The price action definitely does look exciting and it is nice to see price getting up to this range. Maybe we’re not going to get our more lower price tag prices for Bitcoin. We may not go down below five digits, we may not go down to $10,000 to $12,000. I’m totally fine to accept that and maybe we had focused on prices going a bit lower than expected.
But, at the same time, it doesn’t mean that this can’t be a long-term accumulation channel, essentially speaking, that we’re going to get retest back down in this range around $16,000, much like we saw back in the bear market in 2014 and 2015. Notice how we went through a year of sideways chop, and even set in new lows.”
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