Bull Trap In Trading: Everything You Should Know

February 14, 2021 | DWAIPAYAN REGMI

What is Bull Trap?

The bull trap can be explained as a reversal against the bullish trend which forces the long-time traders to abandon their position against their positions during the time of rising losses. An important reason why it is called trap is that it often catches traders off guard and then comes over the back of a strong market rally which appears as it will continue. It has often been regarded as a classic case of a false breakout, where buyers enter a trade with a strong conviction of an upside. So, the stock fails to deliver an upward move and rather hits the traders stop loss or support levels.

In a simple sense, it can be said as the situation where the price is kept higher than it deserves, makes the investors buy, and get out of the market. It not only affects traders’ morale but makes the share market skeptical place time and again.


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Identification of Bull Trap

It is relatively a difficult task to figure out the bull trap. If after a long downfall, the price would go high, it can be regarded that the price of the asset will increase up gradually. But, it would be unknown if the price is natural or not. And then, the trader cannot wait for a long time position before the break out to ensure that the bullish trend is in the continuous process around. It can be carefully evaluated through technical analysis and fundamental analysis – but they don’t act as a reliable source in the Nepalese context either.

In the figure above it can be seen that out of bearish trend, the price of any one stock rises; it keeps rising to one level and when the investors or traders make purchases on a rapid scale with the hope that it could further rise, it falls drastically and comes across the regular bearish trend. This case can happen during a bullish trend too for one specific stock.


Bull Trap in Nepal

There are a lot of times when this trap was kept in Nepal as well. The price of one particular stock had been increased drastically, and when it reached its limit the price began falling. Here, in the picture what we can see is the story of Support Microfinance (SMB) which rose above NPR 2500, and now it has been regularly hitting the negative circuit. Those who bought it at that high price are victims of Bull Trap. Or, during the bull of 2016, the price of the Banking Industry was high. The price in which stocks of banks were traded in 2016 when NEPSE was around in the 1700 range, is not yet achieved when NEPSE is around 2500 too. Those who bought the stocks of banks at that high point – are a victim of Bull Trap.


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Reasons for Bull Trap

Normally when big traders intend to earn a big proportion of money they start playing with the stock, trying to rise the price creating some fake reasons, or unwanted reasons. The mass will follow the trend believing the fake rumors, and then they drastically get down to be a victim of it. They fall in love with the rising price and get excited to own the shares when they don’t find any sellers – ultimately ending up being a victim of the trap. They are normally exercised by professional traders who require further liquidity for trading.


Trading in Bull Trap

It is possible to trade during the bull trap making the best benefit out of it too. This can be done through short term vision tiring to identify that the bear trap is in operation. So, going for short term vision – setting a clear cut target can help to regain the trust that the bull trap made a hole out within. In a simple sense, you can make the best benefit of the bull trap by inserting someone else in the trap and getting out of it taking the profit out of it.


Conclusion

Bull Trap is worldwide practice and has been noticed in the stock exchange market within Nepal and abroad too. This can happen at any time, and there are no regulations that can stop them. Wiser the investor, safer they can be. But, the stock market is all about taking a risk – if you can take the bigger risk, you can always jump into it and gain the best advantage from these circumstances too. Too much greed can make anyone victim of a bull trap – so if you are an investor, invest safely; if you are a trader – play smartly – to get out of a bull trap!


[Mr. Dwaipayan Regmi is currently working as the Assistant Manager in Rastriya Banijya Bank]

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One thought on “Bull Trap In Trading: Everything You Should Know

  • February 15, 2021 at 4:09 am
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    You are the one giving real info and analogy of share-market in our country. Thank you for your acceptable message that educates me to live in the market.

    Reply

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