BullThe bull trap is a false signal in technical analysis and trading. This trap occurs when in the downtrend of a stock, index or digital currency, the price movement changes for a while and convinces market participants that the uptrend has begun; But the trend is reversed and breaks the previous level of support. This price move traps traders and investors and hurts people who have taken long positions. The cow trap may also be referred to as the “whip pattern”. The opposite of a bull trap is called a bear trap, and it is said that in an uptrend, prices fall for a while and then return to the original uptrend. Continue to help an essay You will learn more about this concept from the Inostopedia website.
What is a cow trap and what does it mean?
As mentioned, a bull trap occurs when a trader or investor buys a stock or a pair that has broken a resistance level, thinking that the downtrend is over. This is very common in conventional technical-centric strategies; But unlike many cases where the analysis works correctly, in the trap the price changes direction again and continues the previous downward trend. In this way, traders are trapped and affected by buying assets or taking long positions.
Traders and investors should avoid traps by receiving approvals from the stock or asset chart. For example, a trader should pay attention to the volume of trades to ensure the start of the uptrend, this volume should be higher than the average volume of previous candlesticks. The use of candlesticks can also help, to ensure the upward trend should be followed by cow candles. When resistance is broken, but the volume of exchanges is not enough or uncertain candle patterns such as the “Dodge Star” are seen in the chart, there is a possibility of a cow trap.
Why does a cow trap happen?
From a psychological point of view, a bull trap occurs when buyers are unable to support the uptrend with strength after the break of the upward resistance zone. This inability to support the trend may be due to a reduction in the size and strength of the price movement. In the meantime, sellers take advantage of the opportunity to sell their assets when they see a divergence. The price pulls back on the previous resistance and breaks it downwards, and this causes the buyers’ loss limit to be activated and the price to fall sharply.
What to do in dealing with cow traps?
The best way to deal with cattle traps is to recognize the warning signs before they happen. As mentioned, declining trading volume is one of these symptoms. In such a situation where there is a possibility of a cow trap, the trader should withdraw from the trade as soon as possible. In such cases, setting a loss limit in an exchange can be useful, especially in situations where the market can make emotional decisions.
An example of a cow trap
In this example, during a severe sell-off, the stock price falls rapidly and records a new annual price floor. Then the price recovers quickly and breaks the resistance area of the trend line upwards. Many traders and investors buy assets with the prediction that the resistance is gone. But the price immediately fell sharply and continued its downward trend. Buyers who have taken a long position in the previous two candlesticks will suffer heavy losses unless they have implemented risk management techniques.
The trader or trader must wait for strong confirmations to avoid getting caught in the trap, and after getting these confirmations, enter the trade or set a loss limit very close to the support line and slightly below this line.