A bull trap occurs in trading when, after an asset reaches a new high, its price falls sharply instead of continuing to rise as the trader predicted. Bull traps are commonly created during periods of market insecurity or when false information is circulated about a certain asset.
The term “bull trap” comes from the fact that these traders who don’t know any better are led to believe that an asset which is really declining in value is instead on the rise. This misled belief can result in some heavy losses down the line.
If you believe a bull trap is occurring, traders should immediately exit the trade or enter into a short position. Stop-loss orders can help prevent large losses in these scenarios if the market is moving quickly and you might get caught up in the emotion of it all.
Beware of bull traps; many people have lost a lot of money by purchasing during what they thought was a reversal. When the price of an asset falls and reaches a point where it starts to move sideways instead, this is called “consolidating in a range.” during this time frame, those betting on the price going up (the bulls) are battling against those pushing for it to drop lower (the bears).
When the bears finally win and push the price down to create a new low, it may seem like the downtrend will continue. But Bulls make a comeback more often than not, leading to prices rising back up to their previous high. Many traders see a bullish reversal and start buying as the end of a downtrend, only to be faced with losses when the price resumes its downward trend.
Bull traps work similarly in cryptocurrency as they do with other markets. An example would be if the price of an alternative coin has risen steadily over a period days, one may think it will continue to rise and buy some. The aim is to sell it at a higher price when the market corrects itself.
Crypto Tax Calculator Australia has been created to make tax time easier for Australians who have made crypto currency transactions in the past financial year. The application is simple to use, just upload your CSV file and within minutes you are presented with your tax report. This tax report can then be used as evidence of your crypto currency transactions when lodging your tax return. If you have any questions about how to use Crypto Tax Calculator, our team is here to assist you.