16/08/2024

What Is a Bull Trap in Trading, and How Can You Avoid It?

A bull trap is a market scenario with a deceptive price increase. Traders start buying the asset, expecting the uptrend to continue, but the price soon reverses and begins to fall. As a result, those caught in the trap end up closing their positions at a loss.

Bull traps are common across all markets and often follow a similar pattern, particularly when breaking through obvious resistance levels. Detecting these traps not only helps reduce risk but also enables traders to turn others’ mistakes into profit.

Read more:

How a Bull Trap Works. A Case Study
- The Psychology Factor
How to Detect a Bull Trap on a Chart
Why a Bull Trap Occurs
How to Avoid Getting Caught in a Bull Trap
How to Trade a Bull Trap. Two Examples
- Trading a Bull Trap in a Downtrend
- Trading a Bull Trap in an Uptrend
Pros and Cons of Trading with This Model
FAQ
How to Turn Bull Traps into Profitable Opportunities

Start using ATAS for free with no time limits! Or activate the advanced tariff right now to access the full range of functionality.

To try ATAS free of charge

How Does a Bull Trap Work?

A bull trap happens when there are false breakouts of resistance levels. The processes involved are most clearly visible through cluster charts (footprint).

To illustrate this concept, let’s look at a bull trap example on a 2-hour footprint chart of Nasdaq 100 futures, using the Delta indicator.

1. A bull trap example with explanations

(1) A sudden price spike attracted optimistic buyers. Notice the unusually high surge in positive Delta — this indicates the FOMO effect in trading.

(2) A lot of market buys occurred around the 20900 level, but the price closed below the bright green clusters. Technically, some buyers are already in losing positions — caught in the trap.

(3) Before the release of U.S. inflation news, the price, driven by rumors, moved upward, encouraging even more buyers to go long (and fall deeper into the trap).

(4) The news about U.S. inflation on July 11, 2024, dramatically shifted the price trend. The stock index plummeted, breaking the upward trendline. Traders with open long positions were forced to close them, selling contracts and further accelerating the downward movement. Extremely high negative Delta values indicate a significant shift in market sentiment over two days. Typically, the downward movement happens abruptly, “snapping” the trap shut and minimizing the chances for bulls to escape.

(5) This bull trap occurred when the price broke out above the previous high. Traders were buying, hoping for a continuation of the tech stock rally from the first half of 2024. Meanwhile, sellers’ stop-losses above 20750 were triggered.

(6) This is followed by an increase in market sells (as seen from the negative Delta). Part of these sells comes from those locking in losses after entering long positions (falling into the trap).

(7) Another example of a smaller trap.

A common feature of bull traps is that the closing of long positions acts as “fuel” for further downward movement. When buyers sell off their assets, it speeds up the price drop and helps it break through support levels.

Why Bull Traps Occur. The Psychology Factor

Herd mentality happens when mostly inexperienced traders follow others instead of doing their own analysis. When major peaks are forming (and before prices start to drop), news feeds, social media, and trading forums are often filled with optimistic posts about the asset’s potential for further growth. This boosts the herd mentality, leading more traders to buy without careful analysis.

FOMO (Fear of Missing Out) is triggered simply by watching prices rise quickly. Continually higher prices (especially without significant pullbacks) create the illusion of unstoppable growth, making buying seem like the only smart move — and the sooner, the better.

Confirmation bias. Traders look for and focus on information that confirms their existing beliefs about the market. In bull traps, this shows up as a selective focus on positive news and data that support the idea of a continuing uptrend.

Overconfidence can lead to bull traps when a trader, who has recently had success with several “breakout” trades, takes a large long position, only to face losses as the price turns downward.

How to Detect a Bull Trap on a Chart?

Drawing resistance lines is essential for identifying bull traps. Let’s examine a 15-minute Bitcoin chart from Binance Futures, featuring Delta and the Stacked Imbalance indicator.

On the left side of the chart, you can see a descending trendline acting as resistance.

Number (1) indicates a strong bullish candle showing that buyers became more active (notice the high positive Delta). The candle’s peak aligns with the resistance from the descending trendline.

Market participants likely saw the sharp increase of buyers on candle (1) and expected to enter long positions during a breakout of resistance, anticipating continued buying pressure. It seems they started acting on this expectation at the peak of candle (2).

The price moved above the resistance line and exceeded the high of candle (1), drawing traders to open long positions. The ATAS Magnifier feature, which enables you to look inside the candle, shows bright green clusters— traders were buying dozens, if not hundreds, of Bitcoins… getting caught in a bull trap.

Then the price started to drop. Number (3) indicates a seller imbalance, which happens when market sell orders significantly outweigh market buy orders. Many of these sell orders likely came from buyers who had been caught in the bull trap and were closing their positions.

Another example of a bull trap is indicated by number (4), where the price broke through the 65,000 level. Here, it is more about the activation of stop-loss orders from sellers, positioned behind the psychological round number, rather than reckless entering into long positions by traders.

How Does a Bull Trap Occur?

Bull traps are usually caused by the following circumstances and factors:

✓ Technical factors. False breakouts from consolidation zones and buy signals from technical analysis indicators can initially appear as signals to enter a long position at the start of a new uptrend, but they can be misleading.

✓ News and events. Comments from officials or economic data can lead to a temporary price increase, which then turns into a decline as the market processes the information.

✓ Manipulation by major players. Different market participants have varying levels of capital and resources. Professionals often have better access to insider information, analysis, and trading systems. However, they need liquidity to execute large orders. Therefore, large investors or market makers might intentionally create false buy signals to lure smaller traders into the market and then create their own short lines at their expense.

Example gold futures market, CME data.

(1) A sharp price increase due to strong news drove buyers to act.

(2) However, the surge in market sell orders, visible on Delta and the footprint chart, should raise concerns: is a large player selling long positions? Retail traders cannot move the price of gold by $10 in half an hour.

A large player might face the following challenges:

where can they find more liquidity from buyers to establish a significant short position?
how can they break through the support level below (shown in purple) at a lower cost?

A bull trap (3) with a breakout of local resistance and a quick new high helps with these goals. We will not delve into conspiracy theories about how market makers might influence quotes. Just think of it this way: if the player spends amount X on driving the price up, they can make X2 when the price eventually falls.

As the chart shows, the price dropped quickly because all the “available” bulls in the market were trapped, and the surge in selling pressure (5) created an imbalance in favor of sellers (4). The price slid down easily and, with some effort (as seen from the bright red clusters), broke through the purple support level.

The subsequent downward move (6) around 2477 is no longer a bull trap but rather a test of a high-volume level. A large player might use this level because it contains short positions that have been moved to breakeven. When tested, these positions trigger a wave of buy orders, providing liquidity for the large player to build up more short positions.

(7) – a small bull trap above the local high.

How to Avoid Getting Caught in a Bull Trap?

Read footprint charts. Analyze how price and order flows affect retail traders, leading them to losses while professionals continue to profit.

Monitor the trend. Be cautious about buying during resistance breakouts if the market is in a downtrend.

Have strong reasons for buying. Do not enter long positions based on emotions.

Use advanced volume indicators. Extremely high buying volume without corresponding price progress often signals a bull trap.

Stay informed. Before major news events, the market often becomes volatile due to rumors and announcements, creating conditions for bull traps.

Have a backup plan. The only way to completely avoid bull traps is to stop trading. Always have a plan if the price moves against you when you go long.

How to Trade a Bull Trap?

The general strategy is as follows:

Draw a resistance line.
Wait for the price to break above this resistance.
Confirm that this breakout is actually a bull trap.
Enter a short position with a stop loss and target.

Let’s look at an example using S&P 500 futures (on the left is a 5-minute chart with a bull trap marked, and on the right are the details of the pattern on a 15-second footprint):

4. Trading a bull trap S&P 500 futures example

The resistance line is drawn at the local highs around 5525.

A signal to enter a short position appears from candle analysis:

A surge in buys above 5525, driven by breakout buys and the triggering of sellers’ stop-loss orders.
The price falls below the bright green buying clusters on candle 1. This suggests a possible false breakout and that buyers are falling into a trap.
Despite the buys, the price closes at the lower end. This confirms that the buys (effort) are not leading to any real price increase (result).

Open a short position when you are confident. You can gain extra confirmation if a large sell limit order appears above the current quote.

Where to set the stop-loss. Place it above the peaks at points 1–2–3.

Where to take profits. Aim for support levels. In this example, the nearest target was around 5505.

Example 1. Trading a Bull Trap in a Downtrend

Here is a 10-minute chart of BNB/USDT from Binance Futures. The chart features Stacked Imbalance, Delta, Round Numbers, and Big Trades indicators (red and green circles showing large market sell and buy orders, respectively).

(1) Strong surge. This looks like a culmination of buys, likely driven by bullish news.

(2) False breakouts of the 595 level. These are considered bull traps because buyers expected a rise after breaking through the round level, but instead, the price turned down. The decline accelerated. The price action on the left side of the chart looks like a manipulation, pulling buyers into a losing position.

(3) An intermediate high.

(4) A bull trap. Buyers may have anticipated a recovery since the price had broken past the local high (3) and the 580 level. However, this was risky, given the underlying bearish context.

The price action during the formation of the bull trap can be analyzed in the Magnifier window.

Example 2. Trading a Bull Trap in an Uptrend

July 16, 2024, the S&P 500 futures market — this was the historical high at the time of writing, following a roughly 19% rise since the beginning of the year.

6. A bull trap at the S&P 500 historical high

Delta indicates an abnormal spike in buys as the previous peak was broken. The candle closed below the bright green cluster. If this cluster represented genuine buying strength, the price would have risen. Instead, it started a gradual decline that accelerated. Is not that a bull trap?

Pros and Cons of Trading Bull Traps

Pros:

✔ Bull traps can appear in any market and on any timeframe. They can be used for both intraday trading and swing trading.

✔ They offer insight into how the market operates.

✔ This strategy takes into account the motives of major players.

✔ Footprint charts provide clear visual confirmations.

✔ You can enter short positions near market peaks.

Cons:

✘ Success is not guaranteed. What appears to be a false breakout could turn into a genuine one if the price resumes its upward trend after a pullback.

✘ Trading bull traps often means going against the trend, going short after a period of price increases.

✘ It requires skill and practice. It takes time and experience to master understanding market behavior and forming hypotheses about levels where bull traps may form.

FAQ

What is a bull trap in crypto?

A bull trap in crypto is a situation where an asset’s price temporarily rises above a resistance level, giving the false impression of a new uptrend, only to drop sharply afterward. This often leads to a significant downward trend.

What is a bull trap rally?

It is a short-term, rapid increase in an asset’s price that lures emotional traders to open long positions.

Why do bull traps happen?

Bull traps happen due to a mix of factors like market manipulation by major players, misleading technical signals, the influence of news or events, and the illusion of a steady price rise.

When do bull traps most commonly occur?

They can occur on any instrument and time frame when resistance levels are broken by:

downtrend lines;
psychological price levels;
key and intermediate highs.

Which indicator detects bull traps?

There is no specific indicator designed to identify this pattern. The most effective way to spot a bull trap is by closely analyzing the interaction between price and volume during an attempt to break through significant resistance. Footprint charts are particularly useful for this, as they provide detailed insights into buying and selling dynamics.

What is the difference between a bull trap and a bear trap?

The difference between a bull trap and a bear trap is that they are mirror opposites. Bear traps occur when support levels are broken.

How to Turn Bull Traps into Profitable Opportunities

Trading is about navigating a system where one trader’s gain is another’s loss.

In the context of bull traps, this means entering a short position when other traders make the mistake of buying during a resistance breakout.

To test your skills in detecting bull traps, use the Market Replay simulator. This ATAS platform feature recreates real-time trading conditions using historical data.

Traders can sharpen their skills in a risk-free environment and learn to use footprint charts to improve their effectiveness.

To try the simulator, download the ATAS platform for free, install, and launch it, and then:

Open a chart of a financial instrument.
Click on the Market Replay button in the main ATAS menu.
Activate the Replay mode (the icon should turn green).
Adjust settings if necessary (date, data type).
Start the replay and monitor the chart for signs of a false breakout of the resistance level. Look for confirmation in the footprint chart or with indicators (below is an example of how a trap appears on a delta profile) to make a well-informed decision about opening a short position.

When practicing trading patterns in the Market Replay simulator, you can:

use Chart Trader and other features to trade on the built-in demo Replay account and then analyze your performance;
adjust the playback speed, and pause;
analyze footprint charts;
use more than 400 indicators;
use drawing objects, for example, mark support and resistance levels;
use various chart types (e.g., non-standard Range XV);
use exit strategies;
do much more to learn how to profit from situations where others make mistakes.

ATAS enables you to upload tick data history from cryptocurrency, stock, and futures markets, giving you a comprehensive base to find patterns in price-volume interactions and develop your own swing trading strategy.

Conclusions

Bull traps clearly show that the market is designed in a way that makes it difficult for most participants to profit. Just like a machine with over 100% efficiency is impossible, consistent profits for the majority are equally unlikely.

These traps happen because many retail traders have similar psychological patterns, and the price moves against them as it is the path of least resistance.

Cluster charts and volume analysis indicators such as Delta and profiles enable you to see how buyers often enter positions during false price spikes, only to be caught off guard by sharp declines that follow.

Download ATAS. It is free. Once you install the platform, you will automatically get the free START plan, which includes cryptocurrency trading and basic features. You can use this plan for as long as you like before deciding to upgrade to a more advanced plan for additional ATAS tools. You can also activate the Free Trial at any time, giving you 14 days of full access to all the platform’s features. This trial allows you to explore the benefits of higher-tier plans and make a well-informed decision about purchasing.

Do not miss the next article on our blog. Subscribe to our YouTube channel, follow us on Facebook, Instagram, Telegram or X, where we publish the latest ATAS news. Share life hacks and seek advice from other traders in the Telegram group @ATAS_Discussions.

Information in this article cannot be perceived as a call for investing or buying/selling of any asset on the exchange. All situations, discussed in the article, are provided with the purpose of getting acquainted with the functionality and advantages of the ATAS platform.