Bull Trap: There are many movements that market agents try to predict, and often, they can make mistakes, falling into a bull trap. Therefore, it is essential to understand a bull trap, how to identify one, and the risks associated with trading on the stock exchange.
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What is Bull Trap?
Bull Trap is used when several speculators believe that the market is leaving a low to enter a bull market, but the market’s trend does not match the future reality.
This English expression can translate as a bull trap.
Those more familiar with the market know that “Bull Market” is a term used to say that the demand is increasing or on the way to improving.
In these situations, the investor who chooses to believe in the trends found can suffer significant financial losses.
How Does A Bull Trap Work?
Investors who use technical analysis, in general, take advantage of moments when an analyzed asset crosses the resistance level.
Upon reaching the resistance level, speculators believe the price will begin to follow an upward trajectory.
Many investors are at a loss because they buy assets, believing that a trajectory of appreciation will begin, but the asset depreciates even more.
Therefore, it is possible to verify that using only technical analysis to verify resistance levels is not a guarantee of a statistically significant hit.
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What Is Bear Trap?
In addition to the Bull trap, there is also the bear trap, popularly known in the market as Bear Trap. Some traders operate in favor of the appreciation of the market, and others act according to downtrends.
In the case of the Bear Trap, investors believe that a particular asset is exiting a bullish movement, reaching the resistance level, to start falling.
However, instead of the bear market happening, as investors expected, the market continues to appreciate and thus becomes a bear trap.
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What Are The Characteristics Of A Bull Trap?
Identifying a Bull trap can be a difficult task, especially for those who restrict themselves to using graphical analysis.
It is true that after the break (resistance level reached), the asset tends to appreciate. However, there is no way to completely disassociate assets from what they are, especially in the case of company shares.
Therefore, one must know the most important events related to the asset in question to trading a Bull trap. Another strategy is to analyze whether the investment is being overbought or oversold. If the purchase is overbought, a bearish reversal is likely. On the other hand, if the asset oversells, the uptrend may continue even after reaching the resistance level.
What Are The Risks Of Bull Trap?
For investors, especially those with a greater propensity to make trades, it is essential to know the risk associated with Bull Traps. Among the principal risks of the Bull trap, it is possible to list:
- Risk of high losses, as predicted trends not confirm
- Risk of having to keep inefficiently purchased assets in order not to make a loss
- Investors, especially inexperienced ones, may wrongly perceive a resistance level.
Therefore, it is essential to understand that operations based only on graphical analysis have an above-average risk because, in most cases, they neglect the actual events happening behind the pricing of traded assets.
It is worth mentioning that the fundamental analysis was the most winning in the long run. Therefore, the investor who expects good results is more likely to have good returns when opting for this strategy.
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