What Is a Bull Trap?

A bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions. A bull trap may also refer to a whipsaw pattern.

The opposite of a bull trap is a 澳洲幸运5官方开奖结果体彩网:bear trap, whic꧑h occurs when sellers fail to press a decliꦜne below a breakdown level.

Understanding a Bull Trap

A bull trap occurs when a trader or investor buys a security that breaks out above a resistance level—a common technical analysis-based strategy. While many breakouts are followed by strong moves higher, the security may quickly reverse direction. These are known as "bull traps" because traders and investors who bought the breakout are "trapped" in the trade.

Traders and investors can avoid bull traps by looking for confirmations following a breakout. For example, a trader may look for higher than average volume and bullish 澳洲幸运5官方开奖结果体彩网:candlesticks following a breakout to confirm that price is likely to move higher. A breakout that generates low volume and indecisive candlesticks—such as a 澳洲幸运5官方开奖结果体彩网:doji star—could be a sign of a bull trap.

From a psychological standpoint, bull traps occur when bulls fail to support a rally above a breakout level, which could be due to a lack of momentum and/or profit-taking. Bears may jump on the opportunity to sell the security if they see divergences, dropping prices below resistance levels, which can then trigger 澳洲幸运5官方开奖结果体彩网:stop-loss orders.

The best way to handle bull traps is to recognize warning signs ahead of time, such as low volume breakouts, and exit the trade as quickly as possible if a bull trap is suspected. 澳洲幸运5官方开奖结果体彩网:Stop-loss orders can ꦯbe helpful in the☂se circumstances, especially if the market is moving quickly, to avoid letting emotion drive decision-making.

Example of a Bull Trap

In this example, the security sells off and hits a new 52-week low before rebounding sharply on high volume and lifting into 澳洲幸运5官方开奖结果体彩网:trendline resistance. Many traders and investors jump on to the move, anticipating a breakout above trendl﷽ine resistance but the security reverses at resistance and turns sharply lowe🎀r from these levels. New bulls get trapped in long trades and incur rapid losses, unless aggressive risk management techniques are undertaken.

T𒀰he trader or investor could have avoided the bulꦜl trap by waiting for a breakout to unfold before purchasing the security, or at least mitigated losses by setting a tight stop-loss order just below the breakout level.