Being the survivor of long Bear market periods is not an easy task, and understandably, our anticipation of leaving this dark period behind could lead us to trust the wrong signals. Identifying these signals and knowing how to read them can be key to minimize your risks when trading your way out of these times.
Currently, the crypto market looks like it is giving us traders a break. Bitcoin is stepping out of the Fear position on the Fear and Greed Index scale for the first time in 9 months, and its price movement has overcome massive resistance at $20,000. Sentiment in the market is starting to slowly and carefully change to a more optimistic tone and investors are starting to believe that the Bear is finally ready to say goodbye, and Bull signals might be coming in your direction fast, fierce, and furious.
But then, experienced traders are asking the one million BTC question: Whilst signals are seemingly getting bullish, is this truly a bull run? Or are all investors running straight into what is known as a Bull Trap?
If right now the word “trap” not only made you feel uneasy, but also confused, hang on a little longer. In this week’s article, we will walk you through these terms, how to protect yourself and your funds from the feared Bull Trap, and how to identify a Bull Run to enjoy the benefits of it.
Bull Run 101
Essentially it means good news. This is a market state that all investor’s wish for (except for the bears!). A Bull Run, or a Bull Market, is the time you will see prices trending upwards, causing investors’ sentiments and expectations toward the market to be increasingly optimistic, and industry development moving at full speed.
With investors’ confidence in the market rising, a positive feedback loop emerges, leading to further investment, and causing prices to continue to rise.
Understanding the Bull Trap
Yes, it is just as bad as it sounds, and no investor wants to find themselves stuck in this situation. A Bull Trap happens when investors believe they are facing a Bull Run and start investing, buying in above a resistance level right after a pump. Although many breakouts are followed by strong upward movement, the price can as well rapidly go in the reverse direction. This is when you find yourself in a bull trap, named this way because you buy in at the beginning, middle or current price range of what looks like a bull run, then the price drops and, as a result, your investments get locked until the price recovers.
How can I know the difference?
When it comes to spotting the real deal, there are some indicators to identify a bull run:
- Consistent price growth
- An increase in trading volume
- Positive news and events
- Steady development in the industry
- Media coverage and social interest increasing
If all of these are check marks on your crypto notebook, well, you are most likely facing a Bull Run. Enjoy!
But how to know if the Bull coming in your direction is actually a trap?
Oftentimes a bull trap may occur due to a lack of momentum, liquidity,or investors taking profit (bulls pulling back). Any event which causes investors to lose confidence in the market may cause a price drop during a bullish movement could be another reason, as some of the investors will sell their assets in an attempt to avoid loss, causing the price to drop below the resistance level and triggering other traders’ stop-loss orders.
Other potential signs to look out for:
- Lack of fundamental support for the price increase
- Significant decrease in trading volumes
- A lack of positive news in the media
- Breakouts low in volume
- Indecisive candle patterns
The bottom line
Some things can trick even the most experienced trader, so it’s best to be extra careful when things look too good to be true. The cryptocurrency market can be harsh, and keeping your research and strategies up to date is a must.
You can easily avoid getting into a bull trap if you recognize its signs beforehand. After dealing with harsh times for so long, keeping our emotions in check and avoiding decisions driven by impulses is the best advice. Pro tip? Keep this little manual by your side, do your own research and happy trading!
Disclaimer: Investment and trading can be associated with risk, you should conduct your own research when making a decision. This article serves educational purposes and should not be taken as financial advice.
