List of Financial Market Terms

Technical Analysis is a great tool to have in your Trading belt in stock trading, options trading, futures trading, and day trading, but it does not work 100% of the time. Enter "Bull Trap".

A Bull Trap is a situation in which a bullish technical formation has confirmed itself, then completely changes course. Let's take a look at Amazon.com, Inc for an example. Focus on the highlighted areas rather than the most recent price action.

First we have a strong move up on higher than usual volume (both are highlighted with the blue oval). This indicates the potential for a bull flag. At this stage it is too soon to enter a bullish position.

Amazon.com (AMZN) stock chart

Second we have a break to the upside after some consolidation. The break takes place on slightly higher volume (blue oval).

AMZN bull flag breakout, then fail

The consolidation prior to the breakout tells Technicians that there is in fact a bull flag in the works. Once the breakout above consolidation resistance takes place, the bull flag is confirmed and it's time to buy!

As you can see on the charts above, the breakout confirmation did not last long, and AMZN is now trading well below the previous consolidation support that created the flag.

There is still a chance for AMZN to run higher, but I'd be very disappointed here if I were long AMZN because of the bull flag breakout. 

Bottom Line: The purpose here is to explain what a Bull Trap is and give you a visual example.  Hopefully I got the job done.

Note that a Bear Trap is the inverse.

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