What exactly is a Bull Trap?
The bull trap is described as a reversal of the bullish trend that causes long-term traders to abandon their positions in the face of rising losses. One of the reasons it is known as a trap is that it always takes traders off balance and then arrives on the heels of a powerful market rally that seems to be continuing. It’s also regarded as a textbook example of a false breakout, in which investors enter a trade with a firm expectation that the price will increase. As a result, the stock fails to rise and instead reaches the traders’ stop loss or support levels.
In a nutshell, it is a condition in which the price is held higher than it needs, allowing investors to purchase and leave the market. It not only reduces trader morale, but it also makes the stock market a more skeptical environment.
The job of figuring out the bull trap is relatively difficult. If the price of an asset rises after a long decline, it can be assumed that the asset’s price will rise steadily. However, it is unclear if the price is natural or not. After that, the trader cannot take a long-term position until the break out to ensure that the bullish trend is still active. It can be carefully evaluated using technological and fundamental analysis, but none of these approaches are accurate in the Nepalese context.
The price of any one stock rises out of the bearish trend; it continues to rise to one level, and when buyers or traders make large scale purchases in the expectation that it will rise higher, it falls sharply and returns to the normal bearish trend. This may also occur during a bullish trend for a single stock.
Nepalese Bull Trap
There have been several instances in Nepal where this trap has been used. One specific stock’s price had been dramatically increased, and when it hit its cap, it started to fall. The story of Support Microfinance (SMB) can be seen in the picture, which rose above NPR 2500 and is now regularly hitting the negative circuit. Bull Trap victims are those who purchased it at such a high price. Alternatively, the price of the Banking Industry was high during the 2016 bull market. The price at which bank stocks were exchanged in 2016, when NEPSE was around 1700, has yet to be reached now that NEPSE is around 2500. Those who purchased bank stocks at that high point fell victim to the Bull Trap.
Bull Trap’s Reasons
When big traders want to make a lot of money, they generally start playing with the stock, trying to increase the price by inventing false or unwanted reasons. The general public will follow the pattern of believing false rumors, and as a result, they will become victims. When they can’t find any buyers, they fall in love with the rising price and become excited to own the shares, finally falling prey to the pit. Professional traders who need additional liquidity for trading usually use them.
Bull Pit Investing
It is also possible to trade during the bull trap and make the most profit. This can be accomplished by using short-term vision tiring to detect the presence of a bear trap. So, opting for short-term thinking – i.e., creating a specific goal – will assist in regaining the confidence that the bull trap had ripped a hole in your heart. In a simple sense, you can get the most out of a bull trap by putting someone else in it and then getting out and profiting from it.
Final thoughts
Bull Trap is a worldwide practice that has been observed in Nepalese and international stock exchange markets. This can happen at any moment, and there are no rules in place to prevent it. The smarter the investor, the safer he or she will be. However, the stock market is all about taking a chance – if you’re willing to take a bigger risk, you can still jump in and take advantage of these opportunities. Too much greed can lead to a bull trap for everyone – so if you’re an investor, invest safely; if you’re a trader, play smartly – to avoid falling into one!
