Key takeaways:
Seek confirmation over speculation: Wait for a higher-timeframe close and a solid retest before increasing your position size.
Analyze leverage indicators: Extreme funding along with rising open interest at a critical level indicates potential traps in the opposite direction.
Avoid relying on thin order books: Off-peak liquidity, spoofed orders, listings, or unlocks can create deceptive price movements.
Be mindful of liquidations: Price cascades often signal market exhaustion; rebounds are frequent after forced selling pressure subsides.
Why crypto is a market prone to traps
The trading nature of cryptocurrencies lends itself to traps.
With 24/7 operations, a significant portion of trading volume comes from high-leverage perpetual futures. Consequently, even minor order imbalances can lead to rapid, transient price shifts.
This is why bull and bear traps are prevalent in the crypto market.
A bull trap occurs when the price exceeds resistance and then reverses, while a bear trap takes place when the price dips below support and quickly rebounds. These false breakouts frequently result from forced liquidations and mean reversion, clearing out crowded positions.
Liquidity is generally lowest on weekends and off-hours. Market makers expand spreads to mitigate risk, and a single news item can send prices beyond key support or resistance levels before liquidity resets.
The indicators lie in leverage and market positioning. When perpetual futures funding rates shift strongly positive or negative, it signals that many traders are positioned on one side. A buildup in open interest near significant levels often sets the stage for a squeeze in either direction.
This guide aims to illustrate how to interpret these signals (and wait for confirmation) prior to risking capital.
Did you know? The crypto market often experiences $1 billion in liquidations daily during sharp price moves.
Bull traps: Identifying false breakouts and how to confirm
A bull trap occurs when the price breaks above resistance, luring buyers before reversing lower, leaving latecomers in losing positions.
Price breaches a key level on weak or average volume, shows minimal follow-through, and the subsequent candle closes back within the previous range.
Traders monitoring for confirmation should look for above-average volume and a strong candle close to validate the move. Absence of these signals significantly increases the risk of a trap.
Derivatives can provide early warnings. When funding rates swing sharply positive (long positions paying shorts) and open interest (OI) increases near resistance, it indicates crowded positioning—an ideal setup for a squeeze in the opposite direction.
If the price breaks above resistance while funding spikes and OI rises, treat the breakout with caution until the level is retested and maintained. Healthy indicators following the initial surge include cooling funding rates and OI rebuilding during the retest. Conversely, if open interest declines and the price falls back below the level, the breakout likely failed.
A simple confirmation guideline
Wait for a higher-timeframe close (four-hour or daily) above the level.
Look for a successful retest that remains above.
Expect increasing volume on the breakout and constructive volume during the retest.
If any of these signals are lacking, assume heightened bull-trap risk and limit position size.
Bear traps: Shakeouts below support
A bear trap occurs when the price falls below a prominent support level, enticing traders to short, followed by a sharp reverse upwards, forcing covers and squeezing positions.
A swift push below support (often just a wick) followed by a rapid reclaim and a strong close back inside the range.
Derivatives can offer early signals. When perpetual funding turns significantly negative (shorts paying longs) during the dip, the short side becomes overcrowded, creating the perfect setup for a swift reversal.
Monitor OI: A drop into new lows suggests forced exits. If OI rebuilds as the price reclaims and holds above previous support, conditions are likely forming for a squeeze. Liquidation cascades frequently mark the low; after they exhaust, the price can rise through the level, trapping late shorts.
Confirmation methods
Decisive reclaim: Close back above support on a higher timeframe (four-hour or daily).
Structure shift: The subsequent pullback creates a higher low above the reclaimed level.
Improving participation: Volume and OI stabilize or increase during the reclaim rather than diminishing.
If the reclaim falters on retest, disregard it as noise and withdraw.
Did you know? The “weekend effect” in crypto isn’t just a myth. Studies indicate that trading volume on weekends is 20%-25% lower than during weekdays.
Leverage indicators: Funding, OI, and liquidation cascades
Funding (perpetuals): Perpetual futures don’t have expiration dates, so exchanges utilize periodic funding payments between longs and shorts to align prices with the spot market. When funding becomes strongly positive, longs pay shorts—often indicating crowded long positioning. Deeply negative funding suggests the opposite: overcrowded shorts. Extreme levels typically precede mean-reverting actions.
Open interest: OI reflects the total number of outstanding derivative contracts. When OI rises to a significant level, more leverage is at stake, which adds fuel for a squeeze if prices reverse. A sharp OI drop during a quick move indicates forced de-risking or liquidations. If the price swiftly reclaims the level while OI rebuilds, the risk of traps for late participants increases.
Liquidation cascades: Leveraged positions are automatically closed when margins run low. When prices hit clustered stop or liquidation points, forced buying or selling accelerates the price movement. It often reverses once excess leverage is removed, leaving the classic footprints of bull or bear traps generally observed in Bitcoin (BTC) and other leading assets.
Application: If funding is significantly positive and OI rises towards resistance, treat bullish breakouts with skepticism—this often indicates bull-trap risk. Conversely, if funding is deeply negative and OI has just dropped below support, exercise caution when shorting breakdowns to avoid potential bear traps. Combine these observations with higher-timeframe retests and volume confirmation before increasing your position size.
Order-book and news signals: When “breaks” aren’t as they seem
Thin order books facilitate deceptive moves. On weekends and off-hours, liquidity and market depth decrease, resulting in wider spreads. A single sweep can push prices past a notable level, only to retract on the retest. Kaiko’s data indicates that Bitcoin’s weekend trading volume share fell to 16% in 2024, signaling thinner books and greater slippage risk.
Watch for spoofing, where large bids or asks disappear upon execution, creating a false sense of support or resistance. Spoofing is prohibited in regulated futures markets, and similar occurrences have been recorded on crypto exchanges. Approach abrupt order book changes with caution.
News events can also skew price actions. Listings and token unlocks may temporarily overwhelm lacking market depth, especially in less liquid altcoins, resulting in sharp “breaks” that often reverse once normal order flow resumes. Research on market microstructure surrounding launches and unlocks highlights how depth, fragmentation, and positioning may collaborate to create misleading signals.
Two-step rule: Await the retest. If the “broken” level is reclaimed and maintained with increasing activity (volume or depth), it was likely a trap. Otherwise, you’ve steered clear of unnecessary noise.
Summary: A pre-trade checklist to avoid traps
Retest and hold: False breaks typically fail on the first retest. Consider any breakout or breakdown that hasn’t been retested with skepticism.
Participation check: Seek above-average volume and improving breadth. Weak follow-through elevates trap risk.
Derivatives context: If funding is significantly positive or negative and OI is approaching a key level, positioning is likely crowded—creating potential for a squeeze in the opposite direction.
Liquidation context: After rapid wicks and cascades, avoid chasing movements; snapbacks are conventional once forced flows clear.
Timing and catalysts: Off-hours and weekends often imply reduced liquidity, while listings, unlocks, and headlines can distort prices. Let the retest be the decision-maker.
Higher-timeframe confirmation: Favor a four-hour or daily close above or below the level, followed by a successful retest before increasing position size.
Define invalidation: Clearly identify your risk point and size your positions so that a failed confirmation results in a minor loss rather than a portfolio-impacting event.
If a setup doesn’t clear this checklist, pass on it. Another opportunity will arise.
This article does not offer investment advice or recommendations. Every investment and trading move entails risk, and readers should conduct their own research when making decisions.
