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.
KEY TAKEAWAYS
 A bull trap denotes a reversal that forces market participants on the wrong side of
price action to exit positions with unexpected losses.
 Bull traps occur when buyers fail to support a rally above a breakout level.
 Traders and investors can lower the frequency of bull traps by seeking
confirmation following a breakout through technical indicators and/or pattern
divergences.

What Does a Bull Trap Tell You?

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.

Dealing With Bull Traps

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 How Bull Traps Work

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.