Bull Trap

A bull trap occurs when traders take long positions while the price of a currency pair is increasing, only for the price to reverse and decline. This phenomenon is also referred to as a “sucker’s rally.”

A bull trap misleads some traders into believing that a market has finished its downward movement, making it seem like an opportune moment to buy. However, it quickly becomes clear that it is not a good time to invest, as the price soon changes direction, ensnaring buyers in a losing situation.

Optimistic traders may interpret the recent price movements as a signal that a downtrend has concluded, when in reality, it has not. Instead of continuing to rise, the price either remains stagnant or the downtrend resumes. A bull trap creates a false trend reversal during a downtrend.

This situation is the opposite of a “bear trap,” which can mislead traders into selling prematurely during a bull market.

Bull traps can occur after a downturn seems to have run its course. Following significant price declines, some traders perceive a “bargain” and aim to secure an early position for the anticipated upward movement or to catch the bottom.

Other traders seek to capitalize on this behavior. Typically, institutional traders are the ones who “set” the bull trap by purchasing the currency pair until they deceive other traders into believing that the downtrend has halted.

Large traders will buy substantial amounts to artificially inflate the price, creating a “false bull market.” This scenario is sometimes referred to as a “bull market mirage” or a “bull…sh*t market.”

Bull traps entice traders to enter long positions based on the expectation of continued price increases, which ultimately do not materialize. These initial buying surges may push prices above specific chart levels, triggering additional buying activity.

Naive or inexperienced traders who fall for the bull trap often go long, convinced that prices will rise further. They may even start dreaming of luxury purchases, thinking they will soon be wealthy.

At this point, the institutional traders who orchestrated the trap will sell at the now elevated prices, effectively releasing the “trap.” This counter-movement leads to a sharp price decline.

The breakouts are actually false signals, and the price soon resumes its downward trajectory. Eventually, the “suckers” are compelled to exit their long positions.

To exit a long position necessitates selling, which generates additional selling pressure and causes the price to drop even further. The bulls find themselves ensnared in a trap, having been deceived.

Once the bull trap is released, the price typically returns to its downtrend, maintaining its structural integrity as much as possible.