What is a Bull Trap & How Do I Avoid It?

Notice that this support break occurred with just one box (one O below the prior two O-Columns). The breakdown did not last long as the stock reversed higher to forge a Bear Trap. However, the Bear Trap did not last long either as the stock turned back down and broke below its prior low. The combination of a Triple Bottom Breakdown and Double Bottom Breakdown forged a Bearish Catapult. The chart above shows Snap On with a Quadruple Bottom Breakdown in August 2010. Notice that SNA broke support with only one box or one X below the prior three lows. This breakdown did not last long as the stock quickly reversed and forged a three-box reversal. The rising X-Column extended to forge a Double Top Breakout that fully negated the Quadruple Bottom Breakdown.

In their early formation, bull traps do look like valid and powerful buying signals, especially to traders who trade upside and downside breakouts. 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. A bull trap is a false buying signal that occurs when an equity that has been in a declining pattern quickly reverses direction. This move gets the attention of investors and traders who buy the equity thinking this is the beginning of a bullish trend. However, instead of continuing to move higher, the price of the equity reverses to levels below the prior low. When this occurs, bulls who jumped into a trade believing the equity would move higher are “trapped” on the losing side.

Our trading education

In this article, we’ll go through the basics of moving averages and then learn some life hacks that will help you to use this tool for boosting your trading results. At DTTW, since we have direct market access, our traders are always able to see this volume in real time. 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. Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity interest trading can work against you as well as for you. Read more about ethereum profit calculator usd here. The use of leverage can lead to large losses as well as gains.

Thereafter, a strong bearish candle formed, meaning that the buyers had lost and the sellers were now fully in charge. As such, one way to identify a potential bull trap is when the price makes significant stops on a resistance level after a long sustained uptrend. Most individual investors should avoid trying to time the market, which may cause them to fall prey to bull traps. Some popular indicators of a bull trap include low trade volume and failure for a stock’s price to rise above its moving averages. A relative strength index calculation may be used to identify a possible bull or bear trap. The RSI is a technical indicator, which can help determine whether a stock or cryptocurrency asset is overbought, underbought or neither. Candlestick charts are another handy technical toolto help identify price patterns. Some candlestick chart types are specifically designed to help spot bullish or bearish movement and whether a trend looks to be continuing or reversing . This is an illustration of the type of false break that I was referring to above. The market started with a strong uptrend but then suffered a strong rejection at the resistance level, triggering a massive downward spiral.

Treacherous bull traps

In this illustration, the ranging behavior at the resistance level as well as the huge bullish candle can be seen. The last characteristic of a bull trap setup is that it forms a range-like pattern on the resistance level. A bull trap is most likely to occur after a long bullish trend. This is a sustained upward movement of the price that has been active for a long time.

• The thinkorswim platform has hundreds of technical indicators and studies to choose from, plus dozens of drawing tools so you can create your own patterns.
• Find the approximate amount of currency units to buy or sell so you can control your maximum risk per position.
• This will help you confirm whether there is a break-out or not.
• Therefore, less money would be lost in case the trade became a loser.
• Optimus Futures provides all the tools necessary to help you analyze and design the right future trading strategy.

This video is made available for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. While they are active doing those actions the price will tend to keep dropping. For this reason, when we are taking a trade against a resistance we are asking for trouble. Resistances are classic places where the price trend tends to change very often.

We’re also a community of traders that support each other on our daily trading journey. To exit a long position requires selling, so this selling pressure will cause the price to fall even further. At that point, the institutional traders who set the trap will sell at the now higher price and will release the “trap”. In the chart, the currency pair has entered a downtrend, which is shown by a series of lower swing lows and lower swing highs. But then the price moves above a prior swing high, drawing the downtrend into question. Those looking to buy may choose to jump in, but the rise quickly fails, and the downtrend continues.

A bull trap can occur when the price of an asset rises above a resistance level​, luring in more buyers as they chase the upside breakout. The buying tends to be short-lived, though, and the price may tumble shortly after. It’s called a trap because those ‘bulls’ who bought in as the price was breaking out to new highs must exit or face mounting losses as the price reverses course and declines. Bull traps can be costly for those who get caught but potentially profitable for those who understand what is happening and use this knowledge to trade them. Breakout points vary depending on time horizons and other factors. From a psychological standpoint, bull traps occur when bulls fail to support a rally above a breakout level, which could be due to a lack of momentum and/or profit-taking.

We just, unfortunately, could scrape across another run for him. For long-term investors, a bull trap can be an opportunity to buy the security at a lower price as it falls back down after the rally. They are then able to hold the security for the next uptrend. His six victories this season matches his win total from his 27 starts for the A’s from 2017 to 2021.

This may make these traders more susceptible to getting ‘trapped’ because there is little evidence of an actual sustainable move to the upside. They are buying with a bit of evidence – the price moving above resistance – but they are mostly buying based on hope as the breakout turns out to be fake. Bull markets are rising markets while bear markets are falling markets. Bull traps affect people who are bullish—those who think a stock is about to gain value. Normally, we might expect this breakout to result in a series of higher highs as the level of resistance has been breached. But, in this particular example, the breakout was actually a bear trap. If a trader had opened a long position shortly after the breakout, they would’ve quickly found themselves confronted by a bearish reversal against the prevailing trend. Many traders see this as a bullish reversal and start buying, thinking that the downtrend has ended. For example, surpassing the 20-day moving average may spur stepped-up buying, but is it a true breakout?

There Is No Trend Break

In another recent scandal, a YouTuber called TechLead was found to run a multimillion pump-and-dump scheme on Uniswap. It’s possible that regulated virtual asset service providers will be able to offer trading pairs with Diem, but maybe not less regulated platforms like tradeallcrypto or tradeallcrypto. Traps can develop over several days — or be over within an hour. The shorter ones are more likely to be orchestrated by market-makers or caused by sudden events, such as Elon Musk tweets. Bitcoin Pro to experience a dependable yet simple-to-use and licensed platform that provides a wide range of cryptocurrency assets. Bull means buy as the assumption is higher prices moving forward. XRP price, like many altcoins, has undone its gains witnessed over the last week. This development comes as the Bitcoin price struggles to move above a historically significant barrier. If bears take control of BTC, things could reflect the same for Ripple and other altcoins as well.

We assess the long-term opportunity for seven agricultural technology stocks. As earlier mentioned, if you need to buy at a resistance level, wait until the price comes down to retest it then open a buy order. There is no fixed rule that buying at resistance-zones-turned-support is https://www.beaxy.com/exchange/eth-usd/ wrong. Traders know that a support zone, when broken, becomes a resistance zone. In the same way, a resistance zone, when broken, becomes support. In the final phase of the trap, there is usually a huge bullish candle that dominates most of the immediate candlesticks to the left.