Bull Trap vs. Bear Trap

Whether you're trading bull traps or bear traps you can trust Public.com as your investing platform.

Have you ever been caught in a market situation that seemed like a promising bull run, only to find yourself trapped in a downward spiral? Or perhaps you've experienced the opposite: a seemingly bearish market suddenly turned around, leaving you feeling tricked and entangled in a bullish scenario. These situations are known as bull traps and bear traps, and understanding them can be crucial for successful trading. 

In this article, Benzinga explores bull trap vs. bear trap and the tools and techniques you can use to spot them before they ensnare you. So, let's jump in and lift the veil off these deceptive market movements!

Get Started

Earn Cash Back on Your FX Trades

Open an account in as little as 5 minutes. Spot opportunities, trade and manage your positions from a full suite of mobile and tablet apps.

Get Started

Disclosure: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Show More

What is a Bull Trap?

A bull trap is a false signal generated when the price of a security briefly rallies, leading traders to believe that a new uptrend is forming. However, the sudden optimism proves short-lived as the price reverses course and dips again, trapping those who entered the market with bullish expectations, causing them losses on long positions. A bull trap lures traders into buying at higher prices, only to suffer losses when the market turns bearish.

How to Identify a Bull Trap

One way to detect a bull trap is to use technical analysis tools like the relative strength indicator (RSI) to check if the security is overbought, which may signal a potential reversal. You can also wait for confirmation after a breakout above resistance to determine if the bullish trend will continue. Other strategies to help you spot a bull trap include analyzing the market trend, monitoring volume patterns and paying attention to specific candlestick formations. With these tools and thorough technical analysis, you can increase your chances of sniffing out a bull trap and avoiding potential losses.

What is a Bear Trap?

On the flip side, a bear trap occurs when prices briefly decline, luring traders into selling their positions in anticipation of a further downward trend. But the market then reverses direction and starts moving north, catching those who bet on a continuation of the bearish trend. A bear trap tricks traders into selling at lower prices, only to see the market reverse and shift into a bullish phase.

How to Identify a Bear Trap

Detecting a bear trap requires careful analysis of market conditions and the use of specific technical indicators such as the Relative Strength Indicator (RSI). The RSI can alert you if a security is oversold and possibly due for a reversal. Just like identifying a bull trap, analyzing the overall market trend, examining volume patterns and studying candlestick formations can help you spot potential bear traps. With due diligence and effective use of these tools, you can evade a bearish trap and even capitalize on the subsequent uptrend.

What's the Difference Between a Bull Trap and a Bear Trap?

While bull and bear traps share a common tendency to mislead, they differ in the direction of the false signal and the market position of the trapped trader. A bull trap occurs within a bearish market trend, briefly enticing traders with a convincing rally before resuming the downtrend. It traps traders who enter a long position, anticipating the rally to continue, and creates losses for them. A bear trap takes place within an overall bullish market trend, momentarily tricking traders with a decline before the market resumes its upward trajectory. Traders who sold their assets expecting the downtrend to continue are caught in a bear trap, causing them to lose money on their short positions. Understanding this difference is key to navigating the market and making profitable trading decisions.

Tools for Identifying Bull Traps and Bear Traps

Traders employ various tools and indicators to spot bull and bear traps. The RSI, volume indicators and candlestick patterns are three commonly used tools that provide valuable insights into market dynamics and can help you gauge the likelihood of falling into traps. 

Relative Strength Index

The RSI is a momentum-based technical indicator that measures the strength and speed of price movements. Its values range from 0 to 100, with readings above 70 indicating overbought conditions and below 30 indicating oversold conditions. Traders can use the RSI to identify bull and bear traps by looking for divergences between the price and the indicator. For example, a bearish divergence occurs when the price makes a higher high, but the RSI makes a lower high, indicating weakening bullish momentum. Conversely, a bullish divergence takes place when the price makes a lower low and the RSI makes a higher low, suggesting fading bearish momentum. These divergences can signal potential reversals in the market, helping traders avoid falling into traps.

Volume Indicators

Volume indicators measure trading activity within a specified period and help traders assess the validity of breakouts. Typically, a breakout accompanied by high trade volume signifies strong conviction from buyers or sellers, while low-volume breakouts reek of low enthusiasm and potentially signal a trap.

For example, a bull trap occurs when the price breaks above a resistance level on low volume but subsequently falls below it on high volume, revealing that buyers could not sustain the rally and that sellers regained control. Similarly, a bear trap occurs when the price breaks below a support level on low volume but then rises back above it on high volume, showing that sellers failed to push the price lower and buyers regained dominance.

Candlestick Patterns

Candlestick patterns are graphical depictions of price movements that reveal the open, high, low and close of each period, providing insights into the balance of power between buyers and sellers. Several common candlestick patterns are indicative of such traps.

• Shooting star: Seen at the end of an uptrend, it has a small body near the bottom, a long upper shadow and little or no lower shadow. It signals buyers pushing the price higher but sellers rejecting it, indicating weakening buyer strength and growing seller control. 
• Hammer: Observed at the end of a downtrend, a hammer candlestick shows a small body near the top, a long lower shadow and a minimal upper shadow. It suggests sellers pushing the price lower but buyers rejecting it, indicating weakening seller strength and growing buyer control.
• Doji: A doji, with a small body and varying-length upper and lower shadows, signifies market indecision and uncertainty. It suggests no clear dominance between buyers and sellers, hinting at a potential trend reversal.

Bull and Bear Traps: Evading Market Pitfalls

Understanding bull and bear traps is vital in navigating the volatile trading landscape. Identifying these deceptive market movements using tools like RSI, volume indicators and candlestick patterns enhances decision-making and helps traders avoid falling into costly traps. By equipping yourself with knowledge and the right tools, you approach the market with appropriate caution, minimizing your risk of falling into bull traps and bear traps.

Frequently Asked Questions