There are several steps that must be considered to avoid a bull trap in the trading world, the stages are as follows:
The first is... Risk Management...
This first step is what a trader must do in opening a position when trading, with risk management, traders can minimize losses. Risk management that can be done is to divide the capital and enter the market slowly.
The second, Place a Stop Loss
Stop loss is also part of risk management by placing a stop loss, meaning you can estimate how much loss you can accept.
This stop loss can be adjusted according to the analysis you do, but in general the stop loss that is often used is a 1-2 percent price drop.
Third, Understand RSI
One way to identify a potential bull or bear trap is to calculate the relative strength index (RSI) of the asset.
This technical indicator allows traders to check whether a stock or cryptocurrency asset is overbought, underbought, or not both.
The formula for calculating the RSI is as follows: RSI = 100 – (100 / (1 + (average profit at close / average loss at close)) This is usually calculated over a 14 day period, although it can be applied to other periods as well.
For example, if cryptocurrency ABC had an average profit of 5% and an average loss of 10% at the close for 14 days, the RSI would be calculated this way:
RSI = 100 – (100 / (1 + 2/5))
= 100 – 71,4
= 28.6
The RSI is a number between 0 to 100. An asset with an RSI around 70 is considered overbought, which indicates a potential bearish reversal due to profit taking.
On the other hand, the RSI of 30 and below is considered oversold, which means it is likely to drive up the price.
On the other hand, the RSI of 30 and below is considered oversold, which means it is likely to drive up the price.
A high RSI can be a warning signal of a potential bull trap or bear trap. In the case of a potential bull trap, having a high RSI and overbought conditions means there is increasing selling pressure.
Fourth, Identify by Volume
Volume is another important indicator to watch out for in either a bull trap or a bear trap. Where trading volume must be higher than average to indicate momentum and pressure is increasing to see a strong uptrend, potential swing, or even a price reversal.
The low volume of prices could be a sign that there is a price trap.
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