Spotting Bull and Bear Traps in Crypto: A Practical Checklist

Important points:

• Use confirmation instead of hope. Wait for the end of the higher time frame and a clean retest before deciding on size.

• When reading leverage, extreme funding and rising open interest at significant levels indicate an opposite trap risk.

• Don’t trust thin books. Fake fraud can occur due to after-hours liquidity, spoofed orders, listings, and unlocks.

• Respect the clearing: Cascades often indicate fatigue. When the forced flow is removed, snapback typically occurs.

Why is virtual currency a market with many traps?

The way cryptocurrencies are traded makes it a trap.

The market operates 24/7, with an increasing proportion of trading volume coming from highly leveraged perpetual futures. This means that even small order imbalances can cause sharp, short-term movements.

That is why bull traps and bear traps are so common in cryptocurrencies.

A bullish trap occurs when the price crosses a resistance line and reverses, while a bearish trap occurs when the price falls below a support level and quickly returns. These false breakouts are often caused by forced liquidations or mean reversion, i.e. cleaning out crowded positions.

Liquidity is typically weakest on weekends and after business hours. Market makers are widening spreads to manage risk, and just one headline can send prices above key levels before liquidity is restored.

The hint lies in leverage and positioning. When perpetual futures funding rates turn significantly positive or negative, it indicates congestion on one side of the market. When open interest builds up near key levels, it often sets the stage for a squeeze in either direction.

This guide will show you how to read these signals (and wait for confirmation) before risking your capital.

Did you know? The cryptocurrency market regularly sees $1 billion in daily liquidations during periods of rapid volatility.

Bull Trap: False Breakout and How to Confirm It

A bullish trap occurs when price breaks above resistance and buyers gather before reversing to the lows, leaving late longs out of position.

Price passes through a well-monitored level with weak or average volume, sees little follow-through, and the next candlestick closes within the previous range.

Traders waiting for confirmation will look for above-average volume and strong candlesticks to validate the move. Without these signals, the risk of being trapped increases exponentially.

Derivatives often provide early warning of problems. Positioning becomes crowded when funding rates move rapidly positive (longs paying shorts) and open interest (OI) builds around resistance. This is the best setting for squeezing in the opposite direction.

If the price breaks above resistance while funding a spike or OI balloon, treat the breakout as suspicious until that level is retested and held. After the initial pop, healthy signs include cooling of funds and restructuring of OI on retest. Conversely, if the open interest unravels and the price falls below the level, the breakout is likely to fail.

Simple confirmation rules

• Wait for a close on a higher timeframe (4-hour or daily) above this level.

• Look for successful retests that maintain.

• We can expect an increase in volume at the break and an increase in volume at the retest.

If any of these signals are missing, assume the risk of a bull trap is increasing and keep your position size small.

Bear Trap: Shakeout below support

A bear trap occurs when the price falls below a widely observed support level, drawing traders short, and then reversing sharply, forcing them to cover and squeezing their positions.

A quick push into support (often just a core) followed by an aggressive reclaim and a strong close back into range.

Derivatives may reveal early clues. When permanent funding is significantly negative (shorts paying longs) and we enter a push, the short side becomes overcrowded, creating the perfect conditions for a sharp reversal.

Track OI: A flash to the low suggests a forced exit. If OI recovers as price recovers and sustains above previous support, a squeeze condition could form. Liquidation cascades often mark a bottom. Once they are exhausted, price can rebound above that level and trap late-stage shorts.

How to check

• Definitive recovery: Close above support on a longer time frame (4 hours or daily).

• Structural changes: The next pullback will form an even higher low above the recovered level.

• Improving participation: Volume and OI will stabilize or build on recovery rather than disappear.

If reuse fails on retest, treat it as noise and set it aside.

Did you know? The “weekend effect” in cryptocurrencies is more than just folklore. the study show Weekend trading volumes are 20% to 25% lower than weekdays.

Leveraging fingerprints: Financing, OI, and liquidation cascades

• Funding (perpetual): Perpetual futures have no expiration date, so exchanges use periodic funding payments between longs and shorts to keep the price in line with the spot market. When funding turns significantly positive, longs pay shorts. This is usually a sign that long positions are crowded. If funds are significantly negative, the opposite is true, indicating a concentration of shorts. Extreme measurements often precede movements that reverse the average.

• Open interest: OI measures the total number of outstanding derivative contracts. If OI rises to a major level, further leverage is at risk. This adds “fuel” to the squeeze in case the price reverses. A sharp OI flash during fast movement indicates forced risk aversion or liquidation. If the price quickly regains that level while the OI is reconstituted, the late entrant trap risk increases.

• Liquidation cascade: If the margin is insufficient, leveraged positions will be automatically closed. When the price reaches a concentration stop or liquidation level, a forced sell or buy accelerates the move. Once over-leveraged, it often snaps back. This snapback leaves behind the classic bull or bear trap footprint seen repeatedly in Bitcoin (BTC) and other major assets.

• How to use: If funding is very positive and OI is rising to resistance, treat the upside break with skepticism. This usually indicates a bull trap risk. If funding is significantly negative and OI has just fallen below support, be careful during a short break. This often indicates the danger of bear traps. Combine these leads with a longer time frame retest and hold and volume confirmation before increasing your position size.

Order books and news tell us: When a “break” isn’t what it seems

Thinner books make it easier to fake moves. On weekends and after hours, liquidity and depth decrease and spreads widen. A single sweep can cause the price to rise to an obvious level, but a retest will only cause it to fall. According to Kaiko’s data, Bitcoin’s share of weekend trading volume will fall to 16% in 2024. This is a sign of thinning books and increasing slippage risk.

Be wary of impersonations and high bids and demands that disappear on contact and create the illusion of support or resistance. Spoofing is illegal in regulated futures markets, and similar patterns have been documented on crypto exchanges. Please be careful about sudden changes to the order book.

Catalyst windows can also distort price movements. Especially for altcoins with low liquidity, listing and token unlocking can temporarily overwhelm shallow market depth. This can result in sharp “breaks” that are often reversed once order flow normalizes. Our study of the launch and unlock market microstructure shows how depth, fragmentation, and positioning combine to create these head fakes.

Two-step rule: Wait to retest. If the “broken” level is restored and held with increased participation (volume or depth), it may have been a trap. If not, you’ve avoided chasing the noise.

Summary: Pre-trade checklist to avoid traps

1. Retest and hold: False breaks often result in failure on the first retest. Treat any pimples or breakdowns that have not been re-examined as suspicious.

2. Confirm participation: Aim for more volume and width than average. A weak follow-through means a high risk of trapping.

3. Derivatives background: If funding is very positive or negative and OI is rising to a certain level, the positioning will be crowded. This creates the primary fuel for the squeeze in the opposite direction.

4. Liquidation status: Once you get the lead out quickly and it cascades, try not to chase it. Snapback typically occurs when forced flow is removed.

5. Timing and catalyst: Books are thinner after hours and on weekends, and prices can be distorted by listings, unlocks, and headlines. Let’s decide by re-examination.

6. Proof on a longer time frame: I like to see the 4-hour or daily close above or below that level and see a successful retest before adjusting the size.

7. Define invalidation. Figure out exactly where you went wrong and adjust your position so that a failed confirmation is a small loss rather than an event in your portfolio.

If your setup cannot pass this checklist, please skip it. There’s always another deal.

This article does not contain investment advice or recommendations. All investment and trading moves involve risk and readers should conduct their own research when making decisions.