How to spot a bull trap. A bull trap is a false signal of a market reversal. Learn how to avoid falling for this trap and protect your investments.

A bull trap is a situation where traders are misled into buying an asset that is breaking out above a resistance level, only to see the price reverse and fall below the resistance level again. This can result in losses for the buyers who entered the market too early or did not exit in time. To spot a bull trap, you can use some of the following methods:

• Look for signs of weakening momentum in the bullish trend, such as shorter candlesticks, lower volume, or lower highs.
• Use technical indicators such as the relative strength index (RSI) or the moving average convergence divergence (MACD) to identify overbought conditions or divergence between the price and the indicator.
• Wait for confirmation of the breakout, such as a close above the resistance level on a higher time frame, or a retest of the resistance level as support.
• Use stop-loss orders to protect your position in case of a reversal, and consider using trailing stops to lock in profits as the price moves in your favor.

Bull traps can be tricky to avoid, but by using these methods, you can increase your chances of identifying them and trading them successfully.