What is a bull trap in trading—and how to avoid one
Key points
- A bull trap is a trading term describing a move that “tricks” investors into buying on a false signal, only for the market to reverse.
- It typically appears when traders are unable or unwilling to sustain an upward move.
- The risk rises when investors make emotional, hasty decisions based on a limited trading toolkit.
How do traders fall into a bull trap?
This set-up emerges when the market shows early signs of continued gains or a possible turn from a downtrend to an uptrend. The “trick” is that buyers expect bulls to take control, while real strength still lies with sellers (“bears”).
For example, a bull trap can form during a downtrend when an asset’s price pushes above a resistance level after an upside breakout. Traders may read this as a reversal and renewed demand, start buying in anticipation of further gains—only for sellers to prove “stronger” and push the market back down.
Alongside bull traps, traders also speak of a “bear trap”, when the market “tricks” sellers. Many cryptocurrency traders were caught in one in mid‑2020, ahead of the 2020–2021 bull rally.
Why is a bull trap used?
A bull trap is a straightforward way to create advantageous selling conditions: the higher the exit price, the greater the profit from offloading an asset.
In bitcoin and other cryptocurrencies, large traders acting as “bears” can exploit a weak upward trend. They do not hinder rising prices and may even nudge the asset towards levels that look attractive to buyers.
This fosters the illusion of favourable conditions for continued gains and buyer dominance. A bull trap is not necessarily a “man‑made” process; it can also arise from a brief, positive market reaction to news or an event.
Why do traders get caught in bull traps?
Despite markets’ complexity, several common factors drive bull traps.
Emotions. Emotional participants are prone to rash trades. Any small rise or bounce is taken as a reversal and a buy signal, leading to snap judgments and losses.
Trading tools. Traders relying on too few factors and indicators miss the bigger picture. For instance, a sharp price rise is an insufficient buy signal if volumes during the move are far below prior periods.
Psychology. Traders who have convinced themselves the market has already turned may ignore signals or conjure up non‑existent confirmations to fit their strategy.
How to avoid a bull trap?
A bull trap can arise in many circumstances, but there are ways to reduce the risk.
Because bull traps form above resistance, wait for a retest to observe the market’s reaction. A successful hold above the level markedly lowers the odds of a trap.
Monitor trading volumes. A strong move higher on expanding volume can signal growing buyer interest. A price rise without higher volume may indicate weak demand and only a pause by sellers—conditions prone to a bull trap.
As additional tools, use technical analysis indicators such as the Relative Strength Index (RSI), the Stochastic Oscillator and Moving Average Convergence Divergence (MACD).
Further reading
What is a moving average, and how is it used for cryptocurrencies?
What is cryptocurrency arbitrage?
What is dollar-cost averaging?
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