Read on and learn more about bull trap stocks. Find out its causes and what happens after, which can help you make better trading decisions.
What is a Bull Trap?
In a nutshell, a bull trap happens when investors buy assets thinking that the price will continue to move upward. However, it sharply falls after recording new highs. It happens when false information circulates or during market uncertainties, among other situations.
Example of a Bull Trap
For a better understanding of a bull trap meaning, let’s look at an example. Let’s say one company has been on a downward trend for 30 weeks. However, it soon rises for consecutive weeks and breaks resistance.
Some people might interpret it as a strong buy signal. Hence, they buy more. However, a bull trap pattern is underway. The price might downward soon. As a result, you may incur huge losses.
Is a Bull Trap Bullish or Bearish?
A bull trap is initially bullish. Breaking out above resistance might make some people think that the upward trend will continue. However, it soon suffers a downtrend. At this point, it’s bearish. For some, it’s too late to realize, and they’re already losing a lot.
What Happens After a Bull Trap?
Once the bull trap chart shows a downtrend, those who bought during the short-term rise start losing money. The more you invest during a bull trap, the more you’ll lose. Meanwhile, some people may end up selling their assets, thinking that the market will go down further, afraid they will lose more.
What Causes a Bull Trap?
One of the most common causes of a bull trap is a minimal buying volume when the price rallies to its previous high. Weak volumes can mean low interest in an asset. In addition, a false consolidation pattern breakout can also cause bull traps.