How Do You Identify a Bull Trap?
Have you ever been in a situation where it looked like the market was about to turn and then it didn't? And then you were left holding the bag? This can be extremely frustrating, especially if you don't know how to identify a bull trap. So, let's get started! In this blog post, we will discuss what a bull trap is and how you can identify one. We'll also provide some tips on protecting yourself from getting caught in one.
What Is a Bull Trap?
Bull traps are a type of reversal trade that moves sharply, only to fall suddenly and bounce back to the previous price level. It can be difficult to predict which direction prices will move in with bull traps once they hit the top of the range. It looks like prices are on the upswing but then quickly drops back down to where it was before.
The thing that makes bull traps special is how quickly and sharply prices rise and fall back to their previous levels, leaving many traders "trapped" in losing positions. Prices move up sharply before falling back down to where they started. The bulls or bears may have been waiting for an opportunity like this to open new positions on the other side, thinking that they saw a breakout.
It is often designed to lure traders into making risky bets at support or resistance levels because it looks like the market will break out. Traders are ready to pounce on it as soon as it happens. However, prices retreat to the same level they started before moving up again. As a result, traders who bought or sold at the highs of the range have been left "trapped" with losing positions.
How Do You Identify Bull Traps?
So, you are wondering how you can identify bull traps? There's no scientific answer to this question. However, some features tend to occur with most bull traps. Below we look at some of the main characteristics that indicate developing bull traps.
Huge Bullish Candlesticks
Large bullish candlesticks often accompany bull traps. This occurs because bulls may be caught off guard and forced to cover their shorts. This leads to a huge candle that moves prices up fast. However, the move isn't supported by strong buying pressure, so prices quickly return to where they started after a few hours or days.
Bullish candlesticks are often followed by neutral-to-bearish candlestick patterns, like shooting star or doji. They signal the bulls' frustration at their inability to keep prices moving higher.
Sharp Spike
Bull traps often occur when prices dip to key levels of support and then bounce back up quickly, signalling that the bears have lost control. The sharpness of these moves makes it a trap for bulls who think they are catching a falling knife and will keep rising. However, this is not true as prices move down quickly after reaching the highs of the range.
A Range Is Formed
A range often follows bull traps. The range is created as the bulls and bears battle back and forth to control the market. After a sharp move up, prices tend to stall at resistance before falling back down again, forming a range or consolidation zone. This makes it easier for traders to predict where support and resistance levels may be in the future. The range is a good example of a consolidation zone.
Sharp Increases in Volume on the Price Rise
When you see an increase in volume on the price rise, it can indicate a bullish trend reversal. This sharp increase in volume is a common feature for many bull traps. Trapped traders will undoubtedly be buying the highs of the range to cash out their winning positions.
Think of bull traps as opportunities to open short positions at highly overbought conditions for a better entry point. During a bull trap, you'll also see a large increase in volume on the price break. This big spike in volume may seem like a confirmation that the price will continue upwards towards its breakout point.
False Breakouts
Some of the most common bull traps are false breakouts. This happens when prices appear to be breaking out of a trading range, only to retreat inside it after some time has passed. At this point, prices continue in their previous direction instead of continuing up.
False breakouts occur because bulls and bears start taking positions during the breakout period before it starts. This can make it appear as though the breakout has already happened when it hasn't. Prices will start to surge up, only to fall back down after a while.
Multiple Testing of Resistance Level
There tend to be two ways in which a resistance level can be tested. The first is when prices break down and continue lower until they reach the bottom of the trading range again. This is a fake-out and is never good for bulls, especially if it happens more than once.
When prices start moving up within the range again, they will test the resistance level multiple times. These are known as bull traps because bulls are fooled into thinking that prices are going to break out of the range this time around.
Fibonacci Retracements
Bull traps often happen during the development of strong trends. They occur when prices hit resistance levels where many traders are waiting to short it after an upside breakout that seemed likely to fail. Bulls, however, may be tricked into buying into a false breakout because it looks like prices are going to break a key resistance level.
Bull traps can occur within descending triangles or wedges , where bulls have been eager to buy as price approaches the apex of these patterns. Basically, they happen when bears and bulls collide at a major support or resistance level. False breakouts often signal the development of bull traps.
Before you can trade bull traps, it helps to identify the characteristics. The three main features that make up most bull traps are big bullish candlesticks, sharp spikes in price and consolidation after a range has formed. If you see these signs developing on your charts, there's a good chance price may be about to pull back.
