What is a Bull Trap & How Do I Avoid It? (2024)

  • Home
  • Learn
  • Trading guides
  • Bull traps

It takes practice to trade or avoid bull traps, just like any other chart pattern or trading strategy. In this article, you’ll learn what to watch out for, why bull traps happen, with examples and how to take advantage of them. A bull trap can occur in stocks, or any other asset class, on any chart time frame.

See inside our platform

Get tight spreads, no hidden fees and access to 12,000 instruments.

Start trading

Includes free demo account

Trustpilot

What is a Bull Trap & How Do I Avoid It? (1)

Quick link to content:

What is a bull trap?

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.

Bull traps tend to occur in downtrends or bear markets​ when prices start to rise. Buyers may view the rise as a possible end to the downtrend. A technical signal, such as the price moving above a resistance level, may help to increase that confidence. These buyers could jump in but then quickly become overwhelmed by sellers as the downtrend continues.

While bull traps are typically associated with short-term price rises within a downtrend, a bull trap can also occur in a flat market or near the end of an uptrend.

When the price of the asset moves sideways, periodically, it may attempt to move higher, breaking above the prior high of the price range. If there aren’t enough buyers to keep pushing the price higher, the price may tumble back into the range, trapping those who just bought into a losing trade.

The same thing can happen at the end of an uptrend. As the number of buyers dwindles, the price may push slightly above a prior high point – the trap – only to fall sharply because sellers are becoming more dominant.

Bull traps can occur in any financial market, including stocks, indices, or forex trading.

What role does psychology play in bull traps?

Psychology is a key component in bull traps.

First, there is often a desire on the part of buyers to enter a trade at the first sign of a price rise. 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.

Psychology also comes into play when those buyers realise there are no other buyers coming in after them. As selling begins, the traders who just bought may panic and sell, further driving the price down.

Price action​ is simply the manifestation of people’s bullish and bearish actions. While some of these actions are based on well-researched strategies, statistics and experience, price action may also be the result of people taking trades based on fear of missing out (FOMO), greed, anxiety, and other emotions.

How do you identify a bull trap?

While bull traps can vary in how they look, these types of traps can have common technical signs, such as:

  1. A downtrend, a weak uptrend, or the price is moving sideways.
  2. The price moves above a prior high point in price or above a resistance level.
  3. The price is above the prior high or resistance level only briefly.
  4. The price then falls back below the prior high or resistance.
  5. Those who bought may wish to sell or they might face larger losses.
  6. Because there was little to be bullish about in the first place, more experienced traders may take the elevated price as an opportunity to sell. This helps to drive the price lower.

Trade on bull and bear traps with us

Start with a live account

Start with a demo

Examples of bull traps

The gold chart below shows an example of a bull trap:

What is a Bull Trap & How Do I Avoid It? (2)

As you can infer, the price was rising but then experienced a sharp decline followed by a series of lower swing highs (descending red line).

A resistance level forms as the price moves sideways for about one month (blue line).

The price spikes above the resistance line, which may attract buyers who are hoping this is the end of the downtrend. However, it isn’t. The price quickly falls, creating a bull trap and the downtrend resumes.

Below is another example of a bull trap in a EUR/USD chart.

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.

What is a Bull Trap & How Do I Avoid It? (3)

To identify a bull trap, traders could watch for a bearish candlestick chart pattern​ just above the resistance area. A bearish candlestick pattern could indicate that buying momentum has slowed, and selling pressure is coming in. For example, the ‘shooting star’ candlestick pattern helped set the stage for the price decline on the EUR/USD chart.

How do you trade a bull trap?

The lesson of the bull trap is that buying at the very first sign of a possible new uptrend can be dangerous. Many of these attempted moves higher may fail because there is little overall buying pressure to begin with.

When a position turns out to be a losing trade, some traders can make emotional trading decisions that move prices sharply. This phenomenon is known as ‘trapped traders’ and can be used to profit in some circ*mstances.

Therefore, you may consider watching for bull traps as the price moves above a resistance level or prior swing high within a downtrend and consider taking a short position if the price starts dropping below the resistance level or prior swing high.

Here are some possible steps that you could follow.

  1. Open a demo account or to practise trading on bull traps within the financial markets. This is possible via spread betting and contracts for difference (CFD).
  2. Use our product library to pull up charts of assets and find one that is in a downtreUse our product library to pull up charts of assets and find one that is in a downtrend.
  3. Identify a resistance line on the chart by marking the top of a price range or recent swing highs. You can use our extensive range of draw tools to do this.
  4. Wait for the price to move above the resistance level or swing high.
  5. You may consider entering a short trade if the price falls back below the resistance level, as the move higher was a false signal. There are additional tools that can be used for confirmation, such as technical indicators or candlestick patterns.
  6. It may be a good idea to place a stop-loss order above the recent high to control risk in the event that the price continues moving higher.
  7. Consider an exit plan if the trade is profitable. Exit strategies include setting a profit target or using a trailing stop-loss.

Bull trap vs bear trap: what’s the difference?

Whereas a bull trap traps buyers in a losing trade, a bear trap traps sellers or short sellers in a losing trade.

A bear trap typically occurs during an overall uptrend. The price of the asset may experience a short-term decline, dropping below a support level, enticing people to sell existing long positions or take short positions. If there are not enough sellers to keep the downward momentum going, buyers may step in and drive the price higher.

Those who shorted can become trapped in a losing trade and must buy to exit, and those who sold may experience regret for selling and wish to buy again, driving the price higher.

The following chart shows an example of a bear trap that occurred in our US SPX 500 instrument:

What is a Bull Trap & How Do I Avoid It? (4)

The following chart shows an example of a bear trap that occurred in our US SPX 500 instrument:

Triangle patterns may occur when the price of an asset moves within a smaller price area over time. This creates a triangle-like appearance on the chart. Traders may watch for breakouts from these patterns.

Rounded tops and bottoms signal the end up of an uptrend or downtrend, respectively. A rounded top occurs when the price ascent slows down, then starts moving sideways or makes very little progress to the upside, and then starts moving lower. A rounded bottom is similar and occurs after a decline. The rounded bottom looks like a saucer.

These chart patterns, and more, are covered in our guide to the 11 most essential stock chart patterns.

What is a Bull Trap & How Do I Avoid It? (5)

Practise trading with virtual funds

Seamlessly open and close trades, track your progress and set up alerts

Open a demo account

Learn more

FAQ

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 dead cat bounce may exhibit similar characteristics to a bull trap. Learn more about support and resistance.

Is a bull trap bullish or bearish?

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. Read about bear markets and bull markets.

How do you manage risk if caught in a bull trap?

To manage risk when trading in a bull trap, you may consider the use of stop-loss orders​. This order will close out the trade if a certain amount of money is lost or a certain price is reached. Also, consider the position size. Larger position sizes carry greater risk and profit potential than smaller ones.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circ*mstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

See why serious traders choose CMC

Get tight spreads, no hidden fees, access to 12,000 instruments and more.

What is a Bull Trap & How Do I Avoid It? (6)

FCA regulated

What is a Bull Trap & How Do I Avoid It? (7)

Segregated funds

Learn more

Includes free demo account

What is a Bull Trap & How Do I Avoid It? (8)

What is a Bull Trap & How Do I Avoid It? (2024)

FAQs

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

A bull trap fools some traders into thinking a market or individual stock is done falling and that it's a good time to buy. But then it turns out it's not a good time because the price soon resumes its descent, catching buyers in a money-losing trade.

How do you avoid a bull trap? ›

The most reliable way to avoid falling into a bull trap is to be careful while trading potential reversals. New traders often get caught in bull traps because they are too aggressive.

What causes a bull trap? ›

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.

What happens after a bull 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.

How do bull traps work? ›

In falling markets, traders need to be on the lookout for what are called “bull traps.” A bull trap refers to a short-term rally during a downtrend that “traps” the bulls who mistook it for the start of a new uptrend.

What to do if a bull chases you? ›

When escaping an aggressive bull, walk steadily backwards while facing the bull until you're at least 20 feet away. Then you can cautiously turn and continue walking away without running. Sudden movements may trigger an attack. Carry a very sturdy, heavy stick or pipe when you must walk through a pasture with bulls.

How long do bull traps last? ›

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.

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

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.

How to spot a bull? ›

A side view of the animal will offer you the best view to determine the gender. Cows have udders; bulls have scrotum. Steers will not have testes like bulls. Heifers have teats but no visible udder like cows do.

How to identify bull and bear traps? ›

In a bull trap, the market may show signs of an upward trend, such as rising prices and high trading volume. This gives a false impression that prices will continue to rise. In a bear trap, the market may show signs of a downward trend, such as falling prices and low trading volume.

How to spot trapped traders? ›

Look for contrasting short-term momentum and longer-term support/resistance. Emotional traders are easily swayed by short-term momentum. You can find them trapped if you give more weight to significant market levels instead of short-term fluctuations.

How to identify traps in the stock market? ›

Low Multiples

Even if the price of the stock appears attractive, the company data and fundamentals do not meet investor criteria. A company that does not reinvest profits with material improvements, research, development, processes, or contain costs could signal a value trap.

How long can an animal stay in a trap? ›

Captured animals should be released within 24 hours. This is because animals are vulnerable when in traps. Live trapping puts the animal through tons of stress and if left in them for a long time, they could die from dehydration and starvation.

Why is it called a dead cat bounce? ›

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.

What is the bull flag pattern? ›

A bull flag pattern consists of a long upward trend, followed by a short period of downward consolidation before an upward breakout. At the same time, volume increases during the upward trend and decreases during the consolidation.

How to avoid market traps? ›

One common mistake is entering short positions based solely on the price breaking below key support levels without confirmation from volume or other indicators which can lead to bear traps. Traders and investors should always look for multiple confirmations before taking a position.

How do you protect yourself from a bull? ›

If you find yourself in a field with an aggressive bull – it may be growling, staring, pawing the ground or tossing its head – get away immediately. Walk close to a wall or fence when crossing a field so that you can climb over it quickly. Zip up any loose clothing.

How to spot bull and bear traps? ›

In a bull trap, the market may show signs of an upward trend, such as rising prices and high trading volume. This gives a false impression that prices will continue to rise. In a bear trap, the market may show signs of a downward trend, such as falling prices and low trading volume.

How do you stop an angry bull? ›

If you are cornered by a bull, do not run.

Don't. He will chase you. If this happens, slowly leave his flight zone, but as mentioned before do not turn your back on him. If you withdraw to about 20 feet, the encounter will subside, and the bull will turn away.

How to avoid bear traps? ›

Bear traps result from incorrectly predicting a downward trend in a stock's value. Bear traps are dangerous because they can lead to indefinitely high losses. Avoid short sales to ensure you'll never end up in a bear trap, and invest in put options instead.

Top Articles
Latest Posts
Article information

Author: Francesca Jacobs Ret

Last Updated:

Views: 6561

Rating: 4.8 / 5 (68 voted)

Reviews: 91% of readers found this page helpful

Author information

Name: Francesca Jacobs Ret

Birthday: 1996-12-09

Address: Apt. 141 1406 Mitch Summit, New Teganshire, UT 82655-0699

Phone: +2296092334654

Job: Technology Architect

Hobby: Snowboarding, Scouting, Foreign language learning, Dowsing, Baton twirling, Sculpting, Cabaret

Introduction: My name is Francesca Jacobs Ret, I am a innocent, super, beautiful, charming, lucky, gentle, clever person who loves writing and wants to share my knowledge and understanding with you.