What is a Bull Trap?

Key Takeaways

In cryptocurrency trading, a bull trap is the process by which entrants to a market buy an asset at local or macro highs, only for the trend to break down immediately.

The “trap” gets its name from the fact that once they have bought in, these late investors are left holding the asset at an unrealized loss for an extended period of time — or even ad infinitum.

Traders in this position have little choice except to sell at a loss or wait for price to return to their buy-in level. This might never occur, however, and those trading on leverage may see their position or entire account liquidated as a result.

What is a Bull Trap?

Bull traps can occur on any asset, and crypto is no exception.

The phenomenon is relatively straightforward to understand and easy to spot, and is a common sight on both Bitcoin and altcoins across both shorter and longer timeframes.

It involves making late market entrants buy into an asset toward the end of an uptrend. Once they do, price reverses direction and begins to consolidate or trend lower. The latecomers thus hold positions at an unrealized loss — and continue to do so until price returns to their buy-in level.

This may not necessarily happen, however, particularly on nascent altcoin markets where manipulatory practices such as rug pulls are commonplace. 

Ultimately, the victims of bull traps may end up holding a worthless position or find themselves liquidated. 

Understanding Crypto Bull Traps

Thanks to their decentralized nature, crypto markets are fertile ground for bull traps — market participants are constantly looking to buy low and sell high, often at the expense of other, less experienced traders.

How they do this depends on the market and trend, and a bull trap is just one method commonly seen in Bitcoin and altcoin trading venues.

An asset in an uptrend attracts more and more interest as the trend accelerates, causing a snowball effect. The latest market entrants, likely buying simply because others have already bought, quickly find themselves “trapped” at comparatively very high levels — perhaps even at the asset’s all-time high.

This occurs when existing investors, particularly large-volume entities, either lock in profits or sell their positions in their entirety. The latecomers are the exit liquidity, and often allow the ‘smart’ money to sell without causing a snap price crash which would hurt profitability — a phenomenon on exchanges known as slippage.

As such, it can be said that the bull trap is a vehicle for the transfer of value from what is often referred to as ‘dumb’ money to ‘smart’ money.

What Causes a Bull Trap?

Bull traps can be deliberate, but also merely the result of market processes such as Bitcoin’s price cycles.

In the latter case, price may be trending higher for an extended period before reaching a significant level — either a new all-time high or a point of interest for other reasons. The urge to take profit will be higher at these levels, opening up the odds of later buyers becoming ‘trapped’.

Large market players, however, can also manipulate a given market at any price point, inducing a short-term rush for tokens which likewise results in compulsive buyers left holding them underwater.

This allows bull traps to form on both long and short-timeframe charts, and conditions need not be strongly trending or volatile for smart money to engineer them.

How to Identify a Bull Trap

Crypto bull traps emerge as the result of one or more specific conditions which traders can learn to detect in advance. Aside from their characteristic visual appearance on the chart itself, bull traps make their presence known in chart data beforehand.

There are several telltale signs that a bull trap is forming: markedly increased trading volume, price acting around key levels and trend strength indicators becoming overheated.

Keeping these aspects of the market in mind can help participants avoid the classic pitfalls which can render them victims of large-volume traders as part of a bull trap setup.

The characteristic features of bull traps in crypto are as follows:

• Price surging higher, often in a single large candlestick on a given timeframe
• RSI divergence
• Low buying volume not supporting the uptick
• Failure to overcome resistance once a certain level is reached
• Weak rebounds once price retraces

Bull trap price levels

Bull traps rely on trader psychology to be successful, and thus are more likely to occur when a given token trades around levels which are psychologically significant.

These can hold significance on any timeframe: a tap of local highs within a sideways or rangebound market or all-time highs which are revisited after months or years.

Market psychology itself tends to play out in similar ways regardless of the specific asset involved, making crypto bull traps ubiquitous even among established tokens such as Bitcoin and Ether.

Bull Trap Trading Volume

Significant psychological price levels are a common ingredient in manufacturing a bull trap, but not an essential one. Bull traps can occur even when price action is sideways or the asset is trading midrange.

Under such ‘boring’ conditions, large-volume holders can shift liquidity around in order to make it appear as if a new trend is beginning.

On low timeframes, price will start to move, arousing interest from speculators. Those who choose to buy in face being caught in a bull trap when the originators of the move take profit, sending price back to its starting point or lower.

This spike in trading volume in the absence of factors such as a news event or key price level being breached is a classic sign that market participants are attempting to create a takeout in price, generating a bull trap as a result.

Bull Traps and RSI

Using trend momentum indicators, specifically the relative strength index (RSI), can offer a key insight into the likelihood that a given price uptick will result in a bull trap.

RSI essentially measures the strength of an uptrend or downtrend. If it is seen to be losing force as price rises, there is an increased chance that price itself will not be able to sustain its momentum. This is known as a divergence, and more information can be obtained from the dedicated TabTrader Academy article on RSI.

Bull Traps and Liquidity ‘Spoofing’

Crypto markets can play host to manipulatory behaviour by traders with access to large amounts of liquidity. Such traders, who are often called whales, use capital to place large buy or sell orders at specific price points. 

These orders are not intended to be filled; rather, they aim to give a psychological signal to the market so that smaller traders will buy or sell as required, moving price in the desired direction.

This process is known as ‘spoofing’, and is outlawed on traditional regulated financial markets. In crypto, however, it remains commonplace and a key driver of bull traps and their counterpart, the bear trap.

If large orders suddenly appear nearby price, traders should be aware that spoofing is occurring and that buying on the back of an associated uptick in price may result in falling victim to a bull trap.

Bull Trap Examples

Example 1

A classic example of this bull trap setup on longer timeframes is Bitcoin when it reaches new all-time highs. In the chart below, BTC/USD reaches $58,000 in April 2021 before consolidating then falling sharply, leaving anyone who bought in at the highs, which followed four months of uptrend, waiting to break even.

In October 2021, however, price returns to the $58,000 level, producing a fresh rush of buying as sentiment calls for ever more price upside. A brief return below that level is formed within a single daily candle before price once again heads higher, bolstering traders’ confidence in higher levels.

This continues until $69,000, when the uptrend definitively breaks down. BTC/USD attempts to hold $58,000 as support before this fails at the start of December, leaving all buyers since October trapped at the top. It takes over two years for them to break even.

Overlaying RSI data onto the above chart, a divergence can be seen — price makes a higher high at $69,000 while RSI makes a lower high and is trending down.

Example 2

The chart below shows a low-timeframe bull trap on BTC/USD, this time on the 15-minute chart.

The trap itself plays out over a single 24-hour period, leaving opportunistic traders hoping to make a quick profit stuck at local highs. 

Such environments can play host to leveraged trades as traders aim to maximize profits from comparatively small price movements. Leverage is a highly risky practice, and for those on the wrong side of the market, it can quickly become extremely costly.

Difference Between a Bull Trap and a Bear Trap

Bull traps reflect the practice of leaving late buyers stranded at local or macro highs. The inverse of this, where it is sellers who are left behind or underwater, is called a bear trap.

The mechanism involved and telltale signs are common to both bull and bear traps, while a lack of conviction among sellers at the lows, as measured by RSI, is also often present.

The TabTrader Academy has a full explainer on bear traps which can be accessed here.

Conclusion

Bull traps are a common feature of crypto markets which can occur under practically any circumstances. 

They involve buyers acquiring an asset at a local or macro high, only to immediately see an unrealised loss which they are left holding either temporarily or permanently. Some traders will be forced to sell at a loss, and may even face liquidation if price falls too far below their buy-in level.

Bull traps exhibit certain traits which can help market participants avoid them. These include spikes in trading volume and the sudden appearance of large buy or sell orders nearby spot price. If a market is trading near a psychologically significant level, the risk of bull traps forming increases.

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FAQ

What is a bull trap?

A bull trap is a phenomenon on financial asset charts in which buyers enter the market at a local or macro price top, and are then left holding their position at an unrealized loss as it retraces. This can last any length of time, and price may never return to the buyers’ entry price. They may choose to sell at a loss or face liquidation if trading on leverage.

What happens after a bull trap?

Bull traps can mark the start of a long-term downtrend. They also contribute to the psychological significance of a given price point, setting the stage for increased volatility should price revisit it later.

How do I avoid crypto bull traps?

Bull traps display telltale signs even before they complete, and these can be used by market participants to avoid falling victim to them. They include RSI divergences, weak volume and the inability to push above the resistance level which forms after the initial push higher.