Categories: EducationFAQ

What is a Bull Trap?

As we touched upon in a previous article, there are quite a few terms in the financial sector people need to know about. Another of those prominent terms is called a “bull trap”, which is designed to make people believe the value of a particular asset or commodity will rise in price. Right now, the Bitcoin market is filled with bull traps, although there will be some bear traps along the way as well.

Bull Traps Can be Lethal For Any Trading Portfolio

Trading based on emotions and taking advice from others are two of the worst mistakes anyone can make. Unfortunately, it is rather difficult to keep a clear head when engaging in any trading activity. This is particularly true where Bitcoin and cryptocurrency are concerned. It is very easy to get swept up in all of the excitement, That is also where the danger lies these days.

Contrary to a bear trap, a  bull trap is designed to make people believe the value of a tradeable asset will increase spectacularly. Looking at the Bitcoin price chart over the past few days, it is evident the $2,700 mark was a major bull trap. With the BTC price rising so steadily, a lot of people thought there would be no way to stop the momentum. Forward to today, and Bitcoin is barely hanging on to the $2,000 mark.

Bull traps can be very dangerous for anyone who is trading with a larger portfolio. It doesn’t matter if you are a novice or professional trader, anyone can become a victim of a bull trap. Technical analysis can indicate bullish momentum is about to materialize. Some people will jump on these opportunities the first chance they get. Sadly, these will also be the people who feel the brunt of the bull trap effect. Right now, there will be a lot of Bitcoin buyers who bought at the top.

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The bigger question is whether or not one can effectively recover from a bull trap without financial losses. The answer to that question is positive, albeit there is always a caveat. Bull traps can occur in a span of mere minutes and undo any gains made over the past days, weeks, or even months in a heartbeat. Markets need time to recover, but they usually tend to do so over time. Patient traders and speculators will never lose a lot of money from a bull trap, as they know how the markets work.

It is important to note a bull trap is often fueled by another phenomenon known as “FOMO”. The fear of missing out is a very real trend in the world of finance, and it seems to become more apparent in cryptocurrency as well. Whenever FOMO kicks in, it is evident people have a higher chance of falling for a bull trap. This market sentiment is very dangerous, although it can also yield to some quick profits when playing one’s cards right.

Inaccurate signals showing upward momentum of any asset or commodity should always be taken with a grain of salt. It is certainly possible markets to go up and down in value all the time. Learning patterns is one way to protect oneself from such changes, although patterns are also there to be broken. Bitcoin users who feel they bought at a too high price, they should patiently wait for the market to recover. This is not the last price increase we have seen in the Bitcoin market, that much is certain.

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JP Buntinx

JP Buntinx is a FinTech and Bitcoin enthusiast living in Belgium. His passion for finance and technology made him one of the world's leading freelance Bitcoin writers, and he aims to achieve the same level of respect in the FinTech sector.

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