Bull Trap

What is a Bull Trap?

A bull trap is a price pattern where an asset moves sharply higher after a period of downtrend or consolidation, enticing traders to buy in anticipation of a bullish reversal.

However, the rally quickly runs out of upside momentum, and prices reverse back down, “trapping” the new bullish buyers.

Think about it this way. A stock was trading at its all time high of $500 before it consolidated to $490. Now, just 2 days later, the momentum keeps going, and a new high of $501 was reached before the stock price collapsed, closing at $480 per share. This was a bull trap and essentially the opposite of a bear trap setup designed to lure in bulls instead of shorts.

Identifying Potential Bull Traps

There are several potential warning signs that a rally may be a bull trap rather than a genuine move higher. These often include the rally occurring on declining volume and momentum divergences where indicators fail to confirm the price strength.

Rallies that stall out at key resistance levels or prior broken support-turned-resistance can also signal a bull trap is unfolding. The price action sucks in eager bullish buyers before reversing back down.

Consequences of Bull Traps

For traders who get trapped going long during a bull trap, the consequences can be quite costly. As the price reverses back down, the new bullish buyers are forced to sell and exit their positions, often at a lower price than they bought.

This creates excess selling pressure that feeds further downside. Bull traps can lead to significant losses if traders don’t manage their risk properly. They are the mirror image of a bear trap in terms of the emotional and financial hit to trapped traders.

Bull Trap Examples

Some historical examples of potential bull traps cited include the late 2000 dot-com rally in the stock market and the rally before the financial crisis in 2008.

More recently, in 2024, the new bitcoin rally, which had its highs at $73,794, could end up as a bull trap. However, a bull trap can only be identified after-the-fact. It’s like other traps in the wilderness. You only know that you are in there if you get caught.

Certain candlestick patterns, like an upside gap followed by a bearish outside day, can also manifest as shorter-term intraday bull trap signals.

Trading Around Bull Traps

To avoid being trapped on the long side, traders need to be aware of the potential for bull trap setups amid downtrends. Using trend-following indicators like moving averages, monitoring volume, and watching momentum can help sniff them out.

Tight stop losses and proper position sizing is also crucial to limiting risk if a bull trap does unfold. Fading rallies into resistance instead of buying can keep traders out of harm’s way. Experienced traders sometimes look to short bull traps once the pattern is confirmed as well.

Bull Traps in Different Markets

While a trading concept applicable to any asset class, bull traps have been witnessed across various markets over the years. They have trapped bullish stock traders numerous times in down-trending sectors or bear markets.

The crypto markets like Bitcoin are also no stranger to interim bull traps amid larger downtrends. The forex market regularly sees bull and bear trap patterns play out on currency pairs, too, as trending behavior gets faked out before reversing. Regardless of the market, bull traps can mislead and punish over-eager bulls.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.