Use confirmation rather than hope: Wait for the close on a higher time frame and a clear backtest before adding to your position.

Interpreting leverage signals: Extreme funding rates combined with an increase in open contracts at key levels indicate the risk of a trap in the opposite direction.

Do not trust a weak order book: Liquidity during non-trading hours, false orders, listings, or unlocks can create false breakouts.

Respect liquidations: Liquidations often mark exhaustion; once forced liquidations clear, a rebound is common.

The way cryptocurrencies are traded makes them prone to traps.

The market operates around the clock, with an increasing amount of trading volume coming from highly leveraged perpetual contracts. This means that even small order imbalances can trigger severe and short-lived volatility.

This is why bullish traps and bearish traps are so common in the crypto market.

Bullish traps occur when the price breaks above resistance and then reverses, leading late buyers into losses.

Prices break through widely watched levels at or below average trading volume, lacking sustainability, and the next candlestick closes back within the previous range.

Typically, traders validate breakouts by observing above-average trading volume and strong candlestick closes. Without these signals, the risk of a trap significantly increases.

The derivatives market often gives early warnings. When funding rates turn significantly positive (longs paying shorts) and open contracts accumulate near resistance, positions become crowded, creating an ideal environment for a reverse squeeze.

If the price breaks above resistance while funding rates surge and open contracts spike, be skeptical of this breakout until the level is retested and holds. Healthy signs after an initial surge include a drop in funding rates and a reaccumulation of open contracts during the retest. If open contracts quickly decrease and the price falls back below the level, the breakout is likely to fail.

Wait for a close above that level on a higher time frame (four-hour or daily).

Look for a successful retest and hold.

Expect volume to expand on breakouts and be constructive during retests.

If any of these signals are missing, assume the risk of a bullish trap is elevated and maintain a small position.

Bearish traps occur when the price breaks below widely watched support, attracting traders to short, then quickly reverses upward, forcing liquidations and squeezing positions.

A rapid drop below support (often just a wick), followed by a strong recovery and a solid close back within the range.

Derivatives can reveal clues in advance. When funding rates become extremely negative (shorts paying longs) during a decline, the short side is overcrowded, creating a perfect setup for a sharp reversal.

Track open interest (OI): A sell-off at lows indicates forced exits. If the price recovers and holds above previous support while OI rebuilds, squeeze conditions may be forming. A cascade of liquidations often marks a low. Once exhausted, the price can rebound through that level and trap late shorts.

Decisive recovery: Close above on a higher time frame (four-hour or daily).

Structural shift: The next pullback forms a higher low above the recovery level.

Improved participation: Volume and OI stabilize or increase during the recovery, rather than disappearing.

If the retest fails, consider it noise and exit.

Did you know? The "weekend effect" in crypto is not just a myth. Studies show that weekend trading volume is 20%-25% lower than on weekdays.

Funding rates (perpetual contracts): Perpetual contracts have no expiration date, so exchanges use periodic funding payments between longs and shorts to keep prices aligned with the spot market. When funding rates become extremely positive, longs pay shorts—usually a signal that long positions are overcrowded. Extremely negative funding rates indicate the opposite: shorts are overcrowded. Extreme readings often foreshadow mean-reversion moves.

Open interest: OI measures the total number of open derivative contracts. When OI rises to key levels, more leverage is at risk. If the price reverses, this increases the "fuel" for a squeeze. A sharp drop in OI during rapid moves indicates forced de-risking or liquidations. If the price quickly recovers that level while OI rebuilds, the risk of traps for late entrants increases.

Cascade of liquidations: When margin is insufficient, leveraged positions are automatically closed. When the price hits concentrated stop-loss or liquidation levels, forced selling or buying accelerates the move. Once excessive leverage is cleared, a rebound is common. This rebound leaves classic bullish or bearish trap signatures, repeatedly seen in Bitcoin (BTC) and other major assets.

How to use: If funding rates are highly positive and OI is rising at resistance, be skeptical of upward breakouts. This often indicates the risk of a bullish trap. If funding rates are extremely negative and OI has just cleared below support, be cautious when shorting breakouts. This often indicates the risk of a bearish trap. Combine these readings with backtests and volume confirmation on higher time frames before adding to positions.

A weak order book makes false moves easier. During weekends and non-trading hours, liquidity and depth decrease, and spreads widen. A single sweep can push prices through obvious levels, but they fade during retests. Kaiko data shows that Bitcoin's weekend trading volume share dropped to 16% in 2024. This signals thinning order books and increased slippage risk.

Watch for false orders, where large buy or sell orders disappear upon contact, creating the illusion of support or resistance. In regulated futures markets, spoofing is illegal, and similar patterns have been recorded on crypto exchanges. Stay alert to sudden changes in the order book.

Catalyst windows can also distort price behavior. Listings and token unlocks can temporarily overwhelm shallow market depth, especially in illiquid altcoins. This can create sharp "breakouts" that typically reverse once order flow normalizes. Research on market microstructure around releases and unlocks shows how depth, fragmentation, and positions combine to create these false moves.

Two-step rule: Wait for a retest. If the level of the "breakout" is reclaimed and holds with improved participation (volume or depth), it may be a trap. If not, you avoid chasing noise.

Retest and hold: False breakouts often fail on the first retest. Treat any untested breakout or breakdown as suspicious.

Participation confirmation: Look for above-average volume and improved breadth. Weak follow-through means higher trap risk.

Derivatives context: If funding rates are highly positive or negative and OI is rising to a level, positions are overcrowded. This creates major fuel for a squeeze in the opposite direction.

Liquidation context: After rapid wicks and cascades, avoid chasing. A rebound is common once forced liquidations clear.

Timing and catalysts: Non-trading hours and weekends mean thinner order books, while listings, unlocks, and headlines can distort prices. Let the retest decide.

Proof on higher time frames: Prioritize closes above or below that level on a four-hour or daily basis, then add to positions after a successful retest.

Define invalidation: Clearly know where you went wrong and adjust position size so that a failed confirmation results in a small loss rather than a portfolio event.

If a trading opportunity cannot be validated by this checklist, decisively walk away. The market is never short of the next opportunity.

Related: U.S. Congress pushes for the first revision of the Bank Secrecy Act in 50 years.

Original article: “How to Spot Bull and Bear Market Traps in Crypto Before They Catch You”

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