A Bull Trap is a false bullish signal in a bearish market. In practice, this rise in price may suggest that the asset is entering a bullish phase (characterised by a positive trend), prompting investors to buy. The market, after an even sustained ascent, however, returns to a bearish trend, ‘trapping’ within it investors who were hoping to profit.
It is no coincidence that the term Bull Trap refers precisely to the Bull Market, a financial market characterised by a strong positive trend.
The opposite of the Bull Trap is the Bear Trap, which takes its name from the Bear Market. The substantial difference between Bear Trap and Bull Trap lies in the market trend taken into consideration and the type of false signal: in a Bear Trap, the bullish market undergoes a downward trend reversal that leads investors to sell assets, thus causing them to miss out on potential future profits.
How to recognise a Bull Trap? There is no foolproof method, but in general it is important to carry out a careful technical analysis of the market and learn to recognise bull traps from past situations. For example, they can be identified by carefully evaluating the trading volume associated with the asset, i.e. the sum of the quantities sold and bought over a certain period of time. When an asset is actually in a bullish phase, institutional or expert investors are more likely to enter the market in a timely manner, leading to an increase in volumes. If, on the other hand, volumes remain unchanged or change little during the price rise, this could be a trap.
If you are still uncertain whether you’re facing a Bull Trap or not, you can consider another indicator: momentum. This value analyses the change in a market’s prices over a certain time frame and helps determine which trend it might follow in the future. In a nutshell, it is a technical indicator that helps you understand whether the asset price will go up or down. This means that if the price of an asset rises but the momentum remains unchanged, we could be facing a Bull Trap. Usually, in a clearly bullish market, the value of momentum indicators increases along with the price.
There are other technical analysis tools that may or may not confirm the presence of a Bull Trap. In any case, the golden rule to avoid it is not to get carried away by your emotions: if the value of an asset rises suddenly, it is essential to analyse the market with a clear head, without getting caught up in FOMO (Fear of Missing Out) and taking hasty actions.