
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 trader or investor could have avoided the bull 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. 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. 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. 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.

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 bear trap, which occurs when sellers fail to press a decline 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 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 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 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. Stop-loss orders can be helpful in these 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 trendline resistance. Many traders and investors jump on to the move, anticipating a breakout above trendline resistance but the security reverses at resistance and turns sharply lower from these levels. New bulls get trapped in long trades and incur rapid losses, unless aggressive risk management techniques are undertaken.
The trader or investor could have avoided the bull 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.
Image by Sabrina Jiang © Investopedia 2020
Related terms:
Bear Trap
A bear trap denotes a decline that induces market participants to open short sales ahead of a reversal that squeezes those positions into losses. read more
Bull
A bull is an investor who invests in a security expecting the price will rise. Discover what bullish investors look for in stocks and other assets. read more
Candlestick
A candlestick is a type of price chart that displays the high, low, open, and closing prices of a security for a specific period and originated from Japan. read more
Doji : What Is a Doji Candle Pattern?
A doji is a name for a session in which the candlestick for a security has an open and close that are virtually equal and are often components in patterns read more
Hammer Candlestick
A hammer is a candlestick pattern that indicates a price decline is potentially over and an upward price move is forthcoming. read more
Harami Cross and Example
A harami cross is a candlestick pattern that consists of a large candlestick followed by a doji. Sometimes it signals the start of a trend reversal. read more
Rickshaw Man
The rickshaw man is a long candlestick with a doji body, centered between the high and low, that indicates indecision in the market. read more
Stop-Loss Order
Stop-loss orders specify that a security is to be bought or sold when it reaches a predetermined price known as the spot price. read more
Technical Analysis of Stocks and Trends
Technical analysis of stocks and trends is the study of historical market data, including price and volume, to predict future market behavior. read more
Trendline & Example
A trendline is a charting tool used to illustrate the prevailing direction of price. Trendlines are created by connecting highs or lows to represent support and resistance. read more