A bull trap occurs when a steadily declining asset appears to reverse and go upward, but soon resumes its downward trend.
What is a Bull Trap?
Bull traps are false market signals that can take place on an asset, such as a cryptocurrency, that exhibits a strong long-term downward trend.
Technical analysis is one of the most important tools available to day traders: it relies on analyzing price patterns and finding trading signals on an asset’s price chart in order to try to predict its future movements. One of the most important signals is the breakout above a resistance level, which occurs when the price chart goes above a certain line that has been repeatedly reached but never exceeded before.
This usually leads bullish traders to expect further price increases and go long on the asset. While that assessment is sometimes correct, a bull trap occurs when the signal turns out to be false and the price resumes its downward trend soon after the breakout above the resistance line. Thus, the bulls that have bought the asset get trapped in their trades that were based on the misleading signal.
Bull traps can be avoided by employing extra precautions, such as looking for additional confirmation signals of a prolonged bull run after the initial breakout above the resistance. Breakouts coupled with low trading volume are often a sign of an upcoming bull trap.