Spotting Bull and Bear Traps in Crypto: A Practical Checklist

Key points to remember:

• Use confirmation, not hope: wait for a longer closing time and a clean retest before making an assessment.

• Reading Leverage Indicates: Extreme funding and rising open interest to a key level signals a risk trap in the opposite direction.

• Don’t rely on thin books: after-hours cash, fake orders, sign-ups or unlocks can create false breaks.

• Respect liquidations: Cascades often mark exhaustion; rollbacks are common once forced flows dissipate.

Why crypto is a market full of pitfalls

The way cryptocurrencies trade sets them up for pitfalls.

Markets operate 24/7, and a growing share of volume comes from highly leveraged perpetual futures contracts. This means that even small imbalances can trigger sudden, short-lived movements.

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

A bull trap occurs when price breaks above resistance and then reverses, while a bear trap occurs when price dips below support and quickly returns. These false breakouts often result from forced liquidations and mean reversions, eliminating overcrowded positions.

Liquidity is generally lower on weekends and after hours. Market makers widen spreads to manage risk, and a single security can push prices past key levels before liquidity returns.

The clues lie in leverage and positioning. When perpetual futures funding rates become strongly positive or negative, it signals concentration on one side of the market. When open interest approaches key levels, it often sets the stage for squeezes in either direction.

This guide shows how to read these signals (and wait for confirmation) before putting capital at risk.

Did you know? The crypto market regularly experiences billion-dollar daily liquidations during sharp swings.

Bull Traps: False Breakouts and How to Confirm Them

A bull trap occurs when price breaks above resistance, attracting buyers before reversing lower, leaving late longs in losing positions.

Price crosses a well-watched level on low to medium volume, shows little follow-through, and the next candle closes back into the previous range.

Traders waiting for confirmation look for above-average volume and a strong candle close to validate the move. Without these signals, the risk of trap increases sharply.

Derivatives often report problems early. When funding rates swing sharply toward the positive (long positions pay short positions) and open positions (OI) approach resistance, positioning becomes saturated: the perfect setup for a squeeze in the opposite direction.

If price breaks above resistance during OI funding spikes and balloons, treat the breakout as suspicious until the level is retested and holds. After the initial pop, healthy signs include cooling of funding and rebuilding of the OI upon retesting. If, on the other hand, open interest unwinds and the price falls back below the level, the breakout will likely fail.

A simple confirmation rule

• Wait for a longer term close (four hours or daily) above the level

• Look for a new successful test that holds

• Expect expanding volume on pause and constructive volume on retest.

If any of these signals are missing, assume high bull trap risk and keep the position size small.

Bear traps: shaking below the support

A bear trap occurs when price breaks below a widely watched support level, attracts traders into short positions, and then reverses sharply higher, forcing coverings and tightening positions.

A quick push below support (often just a wick), followed by an aggressive recovery and a strong close inside the range.

Derivatives can reveal early clues. When perpetual funding becomes deeply negative (shorts paying for longs) in a decline, the short side becomes overcrowded, creating the perfect setup for a sharp reversal.

OI Track: A push to the lows suggests forced exits. If the OI rebuilds as prices rally and hold above former support, tightening conditions will likely form. Cascades of liquidations often mark the bottom. Once exhausted, prices can rebound and trap late short positions.

How to confirm

• Decisive recovery: Close above the support for a longer period (four hours or daily).

• Change of structure: The next pullback forms a higher low above the recovered level.

• Improve participation: Volume and OI stabilize or rely on recovery rather than disappearing.

If recovery fails on retest, treat it as noise and move away.

Did you know? Crypto’s “weekend effect” isn’t just folklore. Studies to show trading volume on weekends is 20-25% lower than on weekdays.

Leveraging Fingerprints: Funding, IO, and Liquidation Cascades

• Financing (perpetual): Because perpetual futures contracts do not expire, exchanges use periodic funding payments between long and short positions to keep prices aligned with the spot market. When funding becomes strongly positive, long positions pay off short positions, which is generally a sign of saturated long positioning. Deeply negative funding indicates the opposite: crowded shorts. Extreme readings often precede mean reversion movements.

• Open interest: OI measures the total number of derivative contracts outstanding. When OI reaches a key level, greater leverage is at risk. This adds “fuel” for a squeeze if the price reverses. Strong OI flushing during rapid movement signals risk reduction or forced liquidations. If the price quickly returns to the level while the OI rebuilds, the trap risk for late entrants increases.

• Cascades of liquidations: Leveraged positions are automatically closed when there is insufficient margin. When price reaches cluster stop or liquidation levels, forced selling or buying accelerates the move. It often returns once excessive debt is eliminated. This snapback leaves the classic imprint of the bull or bear trap seen repeatedly in Bitcoin (BTC) and other major assets.

• How to use it: If funding is very positive and OI enters resistance, treat upward breakouts with skepticism. This generally signals a risk of a bull trap. If funding is deeply negative and OI has just broken below support, be careful when shorting outages. This often indicates a risk of a bear trap. Pair these readings with a retest and hold over a longer time frame and volume confirmation before increasing the position size.

The backlog and the news say it: when “breaks” are not what they seem

Thin books make it easier to make false moves. On weekends and after hours, liquidity and depth decrease and spreads widen. A single swipe can cause the price to jump to an obvious level, only to disappear when retested. Kaiko data shows that Bitcoin’s share of weekend trading volume has fallen to 16% in 2024. This is a sign of thinner books and a higher risk of slippage.

Watch for spoofs, large bids or asks that disappear on contact, creating the illusion of support or resistance. Impersonation is illegal on regulated futures markets, and similar patterns have been documented on crypto exchanges. Treat sudden changes in the order book with caution.

Catalyst windows can also distort price action. Token listings and unlocks can temporarily overwhelm the shallow market depth, especially in the case of illiquid altcoins. This can produce abrupt “breaks” that often reverse once order flow normalizes. Research into the market microstructure around launches and unlocks shows how depth, fragmentation, and positioning can combine to create these counterfeits.

Two-step rule: wait for the retest. If the “broken” level is recovered and maintained with improved participation (volume or depth), it was likely a trap. Otherwise, you have avoided chasing the noise.

Overview: A pre-negotiation checklist to avoid pitfalls

1. Retest and maintain: False breakouts often fail on the first retest. Treat any breakout or failure that has not been retested as suspicious.

2. Confirmation of participation: Look for above-average volume and improved width. Low tracking means higher trap risk.

3. Context of derivative products: If the funding is very positive or negative and the OI reaches a certain level, the positioning is saturated. This creates prime fuel for pressure in the opposite direction.

4. Context of the liquidation: After a quick streak and stunt, avoid chasing after it. Snapbacks are common after forced feeds are deleted.

5. Timeline and enablers: Off-peak times and weekends mean thinner books, while listings, unlocks and big titles can skew prices. Let the new test decide.

6. Longer term evidence: Prefer a four-hour or daily close above or below the level, followed by a successful retest before making an assessment.

7. Define invalidation: Know exactly where you are going wrong and size your positions so that a confirmation failure is a small loss and not a portfolio event.

If a configuration fails to pass this checklist, ignore it. There is always another exchange.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research before making a decision.