Opposite to the bear trap, a bull trap is based on the market signal fooling traders that the asset's downturn is over, making them buy more. When it doesn't pan out, traders are triggered to abandon their long positions, lest they risk losses.
Imagine following your favorite asset, be it stock or cryptocurrency. As you are monitoring your Japanese candlestick chart, you notice a row of elongated green sticks, indicating that the price will go up. In that scenario, many traders would enter the market before that happens.
However, as soon as they enter the long position, betting on the price going up, there is a sudden trend reversal. Instead of up, the asset's price goes rapidly down. Because of their long positions, the traders are now in a bind, forced to abandon them to cut losses.
On the other hand, they may start shorting the asset, expecting to profit from the decline. This is a bear trap because the price doesn't continue to decline, but goes up instead. In other words, when traders perceive that the asset's price bottomed out, a new bottom appears.
Still, that new bottom is a false one. As you may suspect, identifying a bull trap on time is exceedingly difficult. After all, it is quite common for an asset's price to rise after a breakout. One of the ways to counter a bull trap is to verify if the asset is overbought, in addition to waiting to confirm before opening a long position.
Image Source: IG
Relative Strength Index (RSI) is one of the more important indicators to determine whether the asset is overbought or oversold. Additionally, switching to Bearish Only Candlestick Pattern on your trading platform gives you a better shot at detecting such momentums.
With that said, it bears keeping in mind that indicators can only indicate, not foretell the future. If worst comes to be, to quickly escape the bind of a bull trap, traders should use a stop-loss order.
ELI5 Bull Trap
As opposed to bear trap, a bull trap is a false indication of an upswing in the market. It is when people are tricked into buying assets, only to have them go down soon.