Bullish traps often provide traders with attractive buying opportunities, but if you enter the trade, the price will often reverse causing the trade to be stopped.

However, there are still effective ways that traders can avoid such price traps, and we can even make money with them. Specifically, please continue reading the content below.

Why does the bull trap appear?

Umpteen. It is possible that when the market breaks through an important resistance level, the long traders decide to close their positions, increasing the selling pressure in the market.

Or are bear market traders thinking that the market is currently too bullish and a sell-off occurs. Or it is possible that traders holding previous long positions were stopped out when the market rallied, causing selling pressure to increase.

Sometimes, liquidity is also a reason for the formation of a bull trap. Low market liquidity usually leads to higher volatility. When liquidity dries up, even a relatively small buy order can lead to a large upside move because there aren't enough sellers to absorb the spike in demand. As a result, the market can break through the resistance but immediately reverse as liquidity increases and sellers start re-entering the market.

How to avoid the bull trap

A few ways to avoid the bull trap include:

  • Volume: Volume is an effective way to distinguish valid breakouts. If breakouts occur on low volume, it is most likely a price trap. Low volume often occurs during times of low liquidity, meaning there may not be enough sellers to absorb the breakout until liquidity picks up again.
  • Indecision candlesticks: Another important sign of a bull trap is the appearance of indecision candles such as doji, spinning top. If there are these candles after the breakout, you better not trade. Because valid breakouts are often followed by strong movements and high volume.
  • Pullbacks: When a breakout occurs you should not open a buy position immediately, but should wait for a pullback to confirm the breakout. If the pullbacks fail to find support at the previously broken resistance, it is most likely a bull trap.
  • Multiple retests of resistance: Bullish traps can often be predicted by analyzing previous price behavior. If an important resistance level is retested multiple times, this signals that buyers do not have enough strength to push the price above that resistance level. In other words, any attempt to push the price above resistance can lead to a bull trap.
  • Correlation between markets: In addition to technical resistance levels, smart traders also pay attention to correlations between markets, which can also help them avoid bull traps. Market correlations such as interest rates and bonds, gold and the US dollar, or commodity currencies and commodity prices.

Example of price trap 

Below is an example of a bull trap in the EURUSD H1 bracket:

The number 1 shows strong resistance formed on the H1 chart. The 2 arrows at number 2 show bull traps.

If you look closely at the previous price action, you can notice the price testing this resistance level repeatedly. This is the first sign that buyers do not have enough strength to break through that resistance and any break could turn into a false breakout or bull trap.

Many indecision candles such as doji, spinning top, and pinbar forming around resistance are another sign that the market is indecisive. And it is also important that the attempt to break through the resistance is short-lived. No candle closed above the resistance level.

Those are all signs for traders to avoid opening a long position until we see a clear breakout followed by a pullback confirming the breakout.

As you can see in the image above, the pair has dropped decisively with a strong bearish candlestick pattern at point 3 and a sell can be made there. Stop loss can be placed at the 4th point.