A bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level.The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions. A bull trap may also refer to a whipsaw pattern.
The opposite of a bull trap is a bear trap, which occurs when sellers fail to press a decline below a breakdown level.
Key Takeaways
A bull trap denotes a reversal that forces market participants on the wrong side of price action to exit positions with unexpected losses.
Bull traps occur when buyers fail to support a rally above a breakout level.
Traders and investors can lower the frequency of bull traps by seeking confirmation following a breakout through technical indicators and/or pattern divergences.
A bull trap occurs when a trader orinvestor buys a security that breaks out above a resistance level—a common technical analysis-based strategy. While many breakouts are followed by strong moves higher, the security may quickly reverse direction. These are known as "bull traps" because traders and investors who bought the breakout are "trapped" in the trade.
Traders and investors can avoid bull traps by looking for confirmations following a breakout. For example, a tradermay 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.
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. Bears may jump on the opportunity to sell the security if they see divergences, dropping prices below resistance levels, which can then trigger stop-loss orders.
The best way to handle bull traps is to recognize warning signs ahead of time, such as low volume breakouts, and exit the trade as quickly as possible if a bull trap is suspected. Stop-loss orders can be helpful in these circ*mstances, especially if the market is moving quickly, to avoid letting emotion drive decision-making.
Example of a Bull Trap
In this example, the security sells off and hits a new 52-week low before rebounding sharply on high volume and lifting into trendline resistance. Many traders and investors jump on to the move, anticipating a breakout above trendline resistance but the security reverses at resistance and turns sharply lower from these levels. New bulls get trapped in long trades and incur rapid losses, unless aggressive risk management techniques are undertaken.
The trader or investor could have avoided thebull trap by waiting for a breakout to unfold before purchasing the security, or at least mitigated losses by setting a tight stop-loss order just below the breakout level.
A bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions.
Bull trap vs dead cat bounce: what's the difference? A dead cat bounce is a general term for any upward price movement that occurs during a strong downtrend. A bull trap usually has technical elements involved, such as the price moving above a prior resistance level. This creates the trap.
A bull trap is short-term bullish but longer-term bearish. The bull trap lures in buyers, creating a short-term rise in price. This eventually gives way to selling pressure and a falling price.
Bull traps occur when investors wrongly believe that a stock's price is rising and buy it, only for the price to decline. Bear traps are the opposite, occurring when investors think a stock's price is falling and sell it, only for the price to rise.
Frequently, downtrends are interrupted by brief periods of recovery—or small rallies—during which prices temporarily rise. The name "dead cat bounce" is based on the notion that even a dead cat will bounce if it falls far enough and fast enough. It is an example of a sucker's rally.
However, bull traps are short-lived and the prior downtrend resumes after a few candlesticks. Legitimate bullish moves are sustained and may go on for a long time. Legitimate bullish moves may be followed by a period of price consolidation or a bearish reversal.
The idea behind calling this type of trading pattern a bear trap is that bearish investors are sitting and waiting for prices to fall so they can jump in and profit from short positions, but instead they are trapped when prices reverse course and head higher.
FACT: Virtually all scientific tests confirm that regularly tended and properly sized foothold traps do not cause significant, permanent, or life-threatening injuries. Many trapped animals simply rest or nap when they discover they are effectively restrained.
The direct threat is head-on with head lowered and shoulders hunched and neck curved to the side toward the potential object of the aggression (Photo 2). Pawing with the forefeet, sending dirt flying behind or over the back, as well as rubbing or horning the ground are often components of the threat display (Photo 3).
Some animals, especially mothers desperate to return to their young, will even attempt to chew or twist off their trapped limbs. When they can't escape, their babies are left alone, unable to fend for themselves. Because of the cruelty inherent in the use of steel-jaw traps, they've been banned in many countries.
The use of bear traps is banned in some states, such as California, Colorado, and Washington. In these states, the use, possession, and sale of bear traps are illegal. 2. Other states, such as Alaska, Idaho, Montana, and Wyoming, allow the use of bear traps.
What would happen if an unfortunate human stepped onto a bear trap? Same thing that happens when a bear steps in one. You'd get trapped, you'd be in a lot of pain, and you'd have a very serious leg wound, possibly including broken bones.
Many factors bring about a bull trap, and one of the most common is a lack of buying volume on the rally back up to the previous high. Weak buying volume is an indication that there isn't much interest in the security at a specific low price and that the bulls aren't strong enough to push the price higher.
What Is a Bull Trap in Crypto? A bull trap is effectively the opposite of a bear trap: prices rise, encouraging traders to buy a cryptocurrency. It makes a new high and shortly reverses, putting traders who bought the breakout at a loss.
A: In the crypto market, a bull trap refers to a scenario where traders are lured into buying an asset during a perceived reversal, only to witness the price bounce back down. It is often associated with rapid price recoveries and is sometimes called a "dead cat bounce."
Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.
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