Bull Trap

A bull trap is a situation that occurs when a steadily declining asset convincingly showcases an uptrend only to reverse and resume its downtrend.

What Is a Bull Trap in Crypto?

A bull trap, also known as a whipsaw pattern, sucker rally, or dead cat bounce, refers to a false or misleading market signal that involves a cryptocurrency’s price briefly rising before declining again. It is often characterized by long-term downtrend patterns, which reverse after a convincing rally and decline even further than before.

In crypto bull traps, the asset’s price quickly rises above its previous support level, luring traders into buying more of the asset or opening long positions. The trap typically occurs when the buyers or “bulls” fail to support the rally above the breakout level, either due to profit-taking or lack of momentum. In addition, “bears” may take the opportunity to dump their crypto during the brief increase in prices, sometimes triggering stop-loss orders.

Unsuspecting market participants who bought the asset often end up “trapped” when the cryptocurrency’s price later retreats and continues the downtrend, sometimes even creating new lows. This forces them to exit positions with unexpected losses.

Why Causes Whipsaw Patterns?

Some of the reasons sucker rallies occur include:

• Fake news – False news regarding a long-term downward trending cryptocurrency may convince you and others to purchase the asset, leading to a false impression of a bullish market. The price drops immediately once the investors realize the news is false.
• Fear of missing out (FOMO) –  They are also often a result of investors being scared of missing out on a profitable opportunity. For instance, a lot of investors may purchase a crypto asset when the project receives a small boost, while the earlier investors sell their holdings due to the small increase in value. 
• Rug pulls – Some projects may intentionally inflate the price of their token and disappear with investors’ funds once the value reaches a certain target. After the founders disappear, the value of the project declines to zero, leaving investors with worthless tokens.

How To Identify A Bull Trap

Some of the indicators of a potential whipsaw pattern include:

• Sudden price increase – While unpredictable price increases are nothing new in the crypto world, a massive price surge without a valid reason (such as positive news) should raise eyebrows.
• Constant sell-offs – When a few bulls buy in when the price increases, most bears see the opportunity to sell their assets. A surge in such sell-offs, especially if unbalanced, should indicate that the signal is false.
• Unmatched trading volume – Most whipsaw patterns are indicated with low trading volumes, which fails to support the breakout. The low trading volume indicates that only a few individuals or groups, rather than the entire market, are involved in the positive price trend.

Failure to break resistance – A fake bull market often fails to rise above the regular resistance zone. This should signal a potential sucker rally.