Is it a bull run or a bull trap?

Original article: Bear Rallies – Bull Traps

The latest price movement in cryptocurrencies feels great. The market has increased by double digits over the last week, with Bitcoin (BTC) surging by over 20%. We find ourselves monitoring the charts and our portfolios much more frequently as a result of those wonderful green candles. It's simple to believe that we are once again "off to the moon" when the market is so positive. The current state might be enduring, and possibly we are moving past the market bottom. On the other hand, it could all be a trap.

But before we discuss bear market rallies and bull traps, it's important to take a moment to review what has been going on. Euphoria may create suckers out of all of us.

An Organization-Led Rally

There has been a counter-trend rally during the previous week. The price activity, which swelled more than the main alt-coins, was driven by Bitcoin. The dominance of BTC grew. This shows that the primary driver of the rise is institutional buying. Institutions are the ones who have large sums of money available for use on the sidelines. Alt-coins would have surged higher had ordinary investors been the driving force behind it. The Consumer Price Index (CPI) data from the US Federal Reserve (FED) served as the spark. The fact that the surge started before the official announcement suggests that the markets may have received an early leak of the good news. Additionally, this is more proof that the gathering was organized by an institution.

Sadly, it is unlikely that the trend will continue for the straightforward reason that the macroeconomic condition throughout the world is still dire. We will soon be able to pinpoint exactly what we have been going through. There are currently two market phenomena that everyone needs to be aware of. These are bull traps and bear market relief rallies.

What Are Bull Traps and Bear Market Relief Rallies?

A bear market rally is described as "...usually the result of bullish emotion on the side of risk-tolerant investors and traders" by Investopedia. Prices may start to settle once they have dropped precipitously for a while and panic selling starts to abate (or at least fall at a slower rate).

Bullish investors who aren't afraid to take some risk may now start to repurchase equities in an effort to construct a low-cost basis and maximize potential future returns. This surge in buy orders may temporarily raise prices for a few days, weeks, or even over a month, but if the momentum isn't strong enough (and it usually isn't the first time), market-wide concerns about overvaluation may resurface, startling risk-averse investors who may then sell to limit further losses, sparking another round of bearish selloffs.

Bull traps, on the other hand, are defined as "...false signals, referring to a decreasing trend in a stock, index, or other security that reverses following a convincing rise and breaks a prior support level. The action "traps" investors or traders who followed the purchase signal and causes losses on the ensuing long bets.

Many market participants will find themselves on the losing side of the price movement when the reversal happens, and they might be forced to exit holdings at a loss. Though by no means thorough, take into account the following to lessen your likelihood of becoming caught in the future:

How to Protect Yourself

Implement the market maxim "If in doubt, zoom out." It might be challenging to determine the exact direction of movement over short periods of time, but by taking a step back, the general pattern becomes more obvious. Additionally, note significant degrees of support and opposition.

Determine whether the market, as well as specific coins and tokens, are under or overvalued. Numerous on-chain metrics, such as the MVRV Z-Score, can be used to aid in this. This bitcoin chart aids in determining times when the currency is significantly over or undervalued in comparison to its "fair value."

Also, consider whether what is occurring is only a collection of accumulation. Looking at what the whales are doing by monitoring metrics that track wallet holdings and movements is a straightforward approach to respond to this. You only need to find the ones that work for you out of the numerous additional tools that are available.

Additionally, "Dollar Cost Averaging" will assist you avoid traps over a longer period of time in terms of approach.

 

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