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What is a Bull trap in trading?

A bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions. A bull trap may also refer to a whipsaw pattern.

What happens if a buyer falls into a Bull trap?

Buyers falling into the bull trap will soon find themselves offside when the price reverses and continues its downward movement. Buyers who fail to see the bull trap and do not close their position quickly will incur losses as the price falls. What causes a bull trap? A bull trap generally develops after a sustained bull run.

How do you know if a trader has a Bull trap?

For example, a trader may look for higher than average volume and bullish candlesticks following a breakout to confirm that price is likely to move higher. A breakout that generates low volume and indecisive candlesticks—such as a doji star —could be a sign of a bull trap.

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