What is Bull Trap?

A bull trap is a fake indication in which a trend in a stock, index, or other investment reverses after a compelling rally, and crosses a previous support level. This allures traders and long-time investors to open a new long position or purchase more of the asset. 

It can also be referred to as a “whipsaw pattern”. 

Bull traps are untrustworthy because they give misleading signals that have negative effects on users in all markets. That’s the main reason it is referred to as a "trap". This encourages traders to be extremely careful when they witness a reversal of an asset's price shortly after it completes a breakthrough (a price movement below a support level).

Nevertheless, many optimistic retail investors believe that a breakout will lead to a stronger price comeback, not acknowledging that this doesn’t always happen.

For example, the security sells off and hits a new 52 week low until bouncing back rapidly on heavy volume and breaking through trendline barriers. Investors rush in, expecting a break over trendline barriers, but the security turns at resistance and falls dramatically from these levels.

Technical analysis is a highly useful utensil for traders to have. Specifically, it may analyze price trends and identify trade signals on an asset's price chart in order to forecast its future movements.

One of the most critical indicators is a breakthrough over a resistance level (when the price chart moves above a specific line that has previously been achieved but never beyond).

Bull traps happen when traders are unable to sustain an asset's upward trend following a resistance breakout. Low trading volumes during breakouts are fair predictors of this. To avoid falling into a bull trap, constantly keep in mind the trading volume and subsequent price moves before establishing further strategies after a price breakthrough.

Speaking of experienced market users, they always observe and analyze the movement of an asset in the next period of time, prior to deciding whether or not to establish a further strategy. This is called “confirmation”. Breakouts combined with low trading volume are frequently indicators of an impending bull trap.

A person who is confident that market prices will increase can be referred to as a “bull” or “bullish”. These bullish traders usually assume that the price will increase and stay in the long position with hopes of profiting.

Without the bull trap, there is also the bear trap. It is a bit different since it happens when sellers don’t press decline below a breakdown level.