What Is a Bull Trap and How to Avoid Falling in It

So they’ll usually cause the price to drop quickly and hit those stop losses. In the below example we depicted various types of bull trap patterns. Impatient traders would have jumped into the trade as soon as it broke the trend line, and thus, they would have gotten trapped. These traps are crypto market manipulations carried out by traders holding large quantities of a cryptocurrency. When you see a trap has formed with price making a fake move out of one of these levels you can enter trades in the opposite direction. This can be an area such as a major moving average, but it is often a major resistance level. As the example bear trap shows below; price will at first begin to move lower and through the important support level. As the bears stop loss orders begin to get eaten by the market the momentum will pick up and the trap will be completed with price moving back higher. A trader needs to be prepared for the reversal as sometimes price can continuously move in the breakout direction. A trader needs to be patient enough in order to successfully trade on the bull trap, which means he needs to miss some profitable trades.
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But then it turns out it’s not a good time, because the price soon resumes its descent, catching buyers in a money-losing trap. In many ways, it’s the opposite of a “bear trap,” which can fool traders into selling out too soon in the midst of a bull market. Traders and investors can avoid bull traps by looking for confirmations following a breakout. For example, a trader may look for higher than average volume and bullish candlesticks following a breakout to confirm that price is likely to move higher. A breakout that generates low volume and indecisive candlesticks—such as a doji star—could be a sign of a bull trap. In trading, a bull trap is a situation where an investor buys an asset believing its price will continue to rise but sees it fall sharply after reaching a new high. Bull traps occur during times of market uncertainty or when misinformation about a particular asset is circulating.

Ideally, when a breakout happens, it needs to be confirmed by volume. However, if there is a breakout that has no volume, you should always consider it to be a false breakout. A trader can identify a rally by using technical indicators such as oscillators, which can help to identify overbought assets – one of the key drivers behind market rallies. However, depending on the timescale being used by a trader, the length of a rally can be relative. There will be times when you suspect a bounce in prices but are unsure if a true rebound will take place — or whether it may be a developing bull trap pattern.

Market Data and Calendars

Usually, these bots can easily see the depth of market orders and trap traders in main resistance levels which cause bull traps. In other words, bull trap is a false trading signal which cause traders to open a long position close to resistance levels in hope for short term profit. Bull trap pattern typically occurs at a resistance level and is a bearish signal forming with an uptrend. An investor should search for a bull trap in a bullish market where the price is expected to move in an upward direction. An investor needs to monitor markets carefully to catch a turn in a trend. The opposite of a bull trap is a bear trap, which occurs when sellers fail to press a decline below a breakdown level.

• Conversely, indecisive candlesticks such as a doji candlestick pattern may warn of a bull or bear trap.
• They are buying the stock on the belief that it will be higher by the time they are ready to sell.
• I remember sitting at my desk doing my pre-market scan of open positions and seeing a trade come through at $2.50.

A rounded top occurs when the price ascent slows down, then starts moving sideways or makes very little progress to the upside, and then starts moving lower. Triangle patterns may occur when the price of an asset moves within a smaller price area over time. Psychology also comes into play when those buyers realise there are no other buyers coming in after them. As selling begins, the traders who just bought may panic and sell, further driving the price down. As the number of buyers dwindles, the price may push slightly above a prior high point – the trap – only to fall sharply because sellers are becoming more dominant. He suggested adding a volume function to a daily stock price chart to see how recent trading compares over the past year or so. You’ve learned what is a bull trap and how to avoid a Bull Trap and not get caught on the wrong side of the market.
A bull trap is a harmful pattern for traders, but you can use it in your favour. To do so, identify it ahead of time and avoid entering the market if there’s any sign of its formation. You should avoid bull traps because you risk losing money. We’ve gathered the most efficient methods to help you deal with this situation. If the price moves horizontally within an uptrend, the uptrend will end soon. When the price breaks higher than the horizontal channel’s upper line, stay away from the market to avoid a bull trap. Open a demo account or to practise trading on bull traps within the financial markets.

Accept the Risk

A bear trap is a technical pattern noticed when the price of a crypto asset shows a false reversal of an upward trend to a downward trend. In simple terms, they are fake price drops that a few traders often trigger to mislead inexperienced traders into taking a short position. Therefore, identifying the resistance levels where you can initiate a short sell position is crucial. If the market bounces higher and witnesses the bull trap symptoms previously described, then you have strong potential for a continued trend lower. Secondly, a bull trap will experience a false rebound that is weak with no momentum.

A high RSI and overbought conditions also indicate high selling pressure in the case of a potential bear trap. In such cases, institutions may encourage selling off the asset by pushing prices lower. This is to reduce mounting selling pressure and to re-enter at lower prices for better price positions. The influx in buying demand at this point will drive prices back up. Panic trading happens far often than most people would like to admit. The reason is most traders are either in concentrated positions or simply have not come to grips with the concept that they can lose the money. This leads to these bull traps, where the weak longs panic during climatic events and unload their shares to the smart money. A bull trap is the opposite of a “bear trap” which can fool traders into selling out too soon in the middle of a bull market.

But if it shows signs of strength by closing above the previous candle high, I exit the trade. Because it tells you the buyers are willing to buy at higher prices . When you “chase” a breakout, there’s no logical place for you to set a stop loss so you’re likely to get stopped out, even on a pullback. After all, the textbook says a breakout is “confirmed” when the price closes above Resistance.

Following the short squeeze, bears are forced to sell off their positions to minimize losses or prevent liquidation. MarketBeat empowers individual investors to make better trading decisions by providing real-time financial data and objective market analysis. To help with that, traders should set a firm stop-loss order just below the breakout level. This type of order automatically issues a market order which in this case would cause a stock to be sold once its price hits that target price. On the other hand, many long investors add to their position over time.

Is the Market in a Bull Trap?

The content on this website is provided for informational purposes only and is not intended to constitute professional financial advice. The content is provided on an as-is and as-available basis. Trading any financial instrument involves a significant risk of loss. Tradingindepth.com is not liable for any damages arising out of the use of its contents. When evaluating online brokers, always consult the broker’s website. Tradingindepth.com makes no warranty that its content will be accurate, timely, useful, or reliable. Actually, the bull trap happens exactly in these situations. In the below example we’ll explain liquidity pools in details.

So, let us straighten out, how to predict the occurrence such traps; how to recognize them at the earliest stage of their formation. Imagine, there is an uptrend; then, you notice the price running into resistance level and breaking it; it doesn’t stop there and continues to move higher. Then, a few candlesticks later, the rally phases out, and prices start falling. Those market participants who had open long positions as they notice a breakout of the resistance now feeling nervous as their stop losses are getting hit. Common bull trap chart pattern A bull candlestick breaks and closes above the resistance level, but the next 2 bars are bearish. The second candlestick in the pattern resembles a bearish pin bar type of candlestick. Bull traps are false market signals that can take place on an asset, such as a cryptocurrency, that exhibits a strong long-term downward trend.

What would happen if you stepped on a bear trap?

The professionals are the ones who are aggressively buying and the amateurs are still happily selling, hoping that price turns again. People in disbelieve hold on to their trades that are suddenly turning into a loss. In fact, buying at the retest means the trade is much lower than one placed at the top of the breaking candle. Therefore, less money would be lost in case the trade became a loser. Candlestick patterns and formations are very important when seeking to identify potential market turning points. In the final phase of the trap, there is usually a huge bullish candle that dominates most of the immediate candlesticks to the left.
If you want to fill a big sell order in a certain price, you need lots of buyers to buy from you. So, you should generate a fake demand in that price area and trap buyers there. One of the most useful concepts regard to bull trap is liquidity pools. No matter what market (e.g., Forex, Stock, Cryptocurreny, Commodity, etc.) you’re going to https://www.beaxy.com/cryptocurrency-reviews/how-to-mine-litecoin/ trade on, you should know market dynamics good enough to understand its sentiment. Finally, never open a highly leveraged position in hope for quick profit in these trading setups, because price can easily turn agains you and put you out of the game. Trading breakouts have its own risk, and we mentioned some of them in the above sections.

A bull trap chart pattern is a bearish signal when you see one forming. A bull trap can come in different forms but at the core of it, we are looking for a candlestick that is extremely bullish, break the resistance zone, and then turns bearish. Let’s me show you what to look for and the 3 bull trap chart patterns to look for. Identify major resistance levels and watch the price action when price goes to test these resistance levels again. False signals in the investment industry are known as bull traps and they refer to a declining trend in a stock, security or index that many thought would continue increasing. Therefore, it can be expected that there are some indicators that signal that a price surge is not the start of a bullish trend but a bull trap. When deciding whether to buy a token when its price starts growing or not, check the following details.

When this happens, they can get caught in a bear trap where they can liquidate their position at a loss. Experts recommend having a dual mindset to be successful in both bull and bear markets, as this yields more profits during long-term trends. This usually leads bullish traders to expect further price increases and go long on the asset. Thus, the bulls that have bought the asset get trapped in their trades that were based on the misleading signal. Capital markets like crypto, stocks and forex are full of traps designed to prey on unsuspecting and emotional retail traders.

This gives both the bulls and bears confidence when trading. The bear trap is most commonly experienced by those traders who look to make breakout trades through support levels. But the truth is that a trend can last much longer than anticipated. The best way to trade trends is to filter your trades in the direction of the larger trend. For example, in the bull trap pattern, the trend is still lower; you need to filter the signals.

Traders are placed short, breakout traders jump in to recover their loss, then rejoined the trend after getting stopped out. Another popular way of avoiding limit orders is to use several indicators in your analysis. For example, instead of using just the moving averages, you can combine them with others like the Relative Strength Index and the Money Flow Index . This will help you confirm whether there is a break-out or not.
A bull trap is an opportunity to short and get advantage of the selling pressure that trapped bull traders will add to the market when closing their losses. When a bull trap is suspected, traders should exit the trade immediately or enter into a short position. Read more about what is the price of bitcoin today in us dollars here. Stop-loss orders can come in handy in these scenarios, especially if the market is moving swiftly, to avoid being swept away by emotions. A mistake could either lead to you losing money or a missed opportunity to enter the market at a reasonable price. The best feature of trading is that you can both buy and sell, whether you own the asset or not.