What is Bull Trap in Crypto, and how do you identify it?

Key takeaways

• A bull trap occurs when an asset price goes downward and experiences a brief hike in value
• Bullish traders can fall prey by this short term spike in price and experience losses when the downtrend continues further
• Low trade volume and high RSI are two major signs of a possible bull trap

Introduction 

The crypto space can often be a playground of trickery to manipulate the market, and one such example is a bull trap. A “bull trap” is a particular pattern where the traders are manipulated into buying when the market is trending lower that might eventually lead to severe consequences for the trade. 

This article will explore what a “bull trap” is and how you can avoid it.

What does it mean in crypto?

A bull trap is a false market signal that traders might witness when a strong-term downward asset suddenly appears to recover; however, in reality, the asset is actually about to go down further in the long run. In a bull trap, traders notice a downward trend in anticipation that the cryptocurrency might get a bullish reversal and buy the crypto at a good price. This kind of situation occurs during periods of market volatility or when certain fake information is being circulated regarding a cryptocurrency. 

The term “trap” is associated with the phrase because it conveys a false sense of security that crypto is on the rise, which is contrary to reality and can lead to heavy losses. The price of a crypto in a bull trap usually surpasses the previous support levels of the asset, making the traders believe that the crypto price is surging, leading them to open new long positions or invest more in that particular asset. 

Also referred to as a “dead cat bounce,” in the crypto space, you must always be cautious of a sharp reversal of an asset’s value just after its breakout. This kind of bullish trend is in reality short lived and is ideal for temporary moves instead of a long position. 

How to identify it?

There are a number of factors that lead to bull traps in the crypto trading space, and one of the most common ones is prematurely buying the dip in the hopes of a market low. Bull traps occur when the traders assume that the market downtrend is over. 

However, a false breakout higher along with an early entry is less likely to sustain as the market lacks large buyers. This leads to the sellers continuing to overpower the scarce buyers, which results in the adjustment of the prices to lower levels. The issue gets intensified when the trade of a buyer begins to float at a small loss, and it escalates even more since the market prices keep on readjusting to lower levels. 

Given this challenge, traders tend to rely on technical analysis and chart reading to identify whether a price pattern is the potential development of a bull trap. 

• RSI divergence 

You can spot a potential bull trap by spotting a high RSI. The RSI, or relative strength index, is a technical indicator that determines whether a cryptocurrency is underbought, overbought, or neither. When a possible bull trap occurs, a high RSI and overbought circumstances suggest that there is increased selling pressure. This leads to the first breakout and uptrend, which soon loses its momentum, and most traders are likely to close out their trades at any moment.  

• Lack of momentum 

Naturally, the market tends to move in cycles, which means that when it reaches the peak of a cycle, it enters a period of consolidation where the bulls and the bears fight for control. When you notice that crypto is experiencing a sharp downturn but there is a gentle rebound. That can be an early sign of a bull trap. An absence of momentum is an early sign that the market is due for a reversal. 

• Absence of a volume increase 

A lack of increase in trading volume, which implies that there aren’t many traders buying the security. It is also a major indicator of a possible bull trap. This means it might not be sustainable in the long run, despite the short-term price hike. The price increase could also be due to bots and retail traders competing for position. 

• Absence of range expansion  

There are many descriptions of a “range” in trading. But the most common one is the size of each candle. In a bull trap, when the initial downtrend takes place, the range expansion indicates that there is strong momentum. When there is no range expansion when it is bullish. It indicates a weak bounce and that prices are vulnerable to further adjustments. 

• Breaking below the old low

When you notice the price of a crypto breaking below the previous low, it could indicate a bull trap. As a breakdown below the previous low occurs, it continues a series of lower highs and lower lows. This leads to the sustainability of the bull trap. Following that, the prices tend to move correctly to the downside.

Final words 

A “bull trap” is a common scenario in the crypto space that can cause significant losses to the traders. However, you can easily avoid these scenarios by waiting for technical indicators to signal an incoming bull trap. The key here is patience and due diligence, which will help you experience a positive trading journey.

FAQs

Does the bull trap have a bearish or bullish sentiment?

Bull traps are bullish on a short-term basis but bearish on the long term.

How to avoid a bull trap?

In order to avoid a bull trap, you can look for confirmations after a breakout takes place. Confirmations can include, for example, looking for higher-than-average volume combined with bullish candlesticks to determine whether or not the price will move higher following a breakout.