Key takeaways:

• Exploit confirmation, not hope: wait for a higher time frame to close and a neat retest before making a decision to resize.

• Read the leverage that says: Extreme funding and rising open interest at a key level signal that risk is moving in the opposite direction.

• Don’t trust lean books: out-of-hours liquidity, counterfeit orders, offers or unlocks can cause false interruptions.

• Respect liquidations: Cascades often mean exhaustion; snaps are common when the forced flow is clear.

Why cryptocurrencies are a market full of pitfalls

The way he trades cryptocurrencies exposes him to pitfalls.

The markets operate 24/7, with a growing portion of volume coming from highly leveraged perpetual futures contracts. This means that even miniature order imbalances can trigger keen, short-lived movements.

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

A bull trap occurs when price breaks above resistance and then reverses, while a bear trap occurs when price falls below support and quickly bounces back. These false breakouts often result from forced liquidations and represent a pullback, clearing out crowded positions.

Liquidity is usually lowest on weekends and outside business hours. Market makers are widening spreads to manage risk, and a single headline can push prices beyond key levels before liquidity returns.

The clues lie in the leverage and positioning. When perpetual futures funding rates become strongly positive or negative, it signals clustering on one side of the market. When open interest increases near key levels, it often sets the stage for declines in both directions.

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

Did you know? The cryptocurrency market regularly sees daily liquidations of $1 billion during keen swings.

Bull Traps: False Escapes and Confirmation Methods

A bull trap occurs when price breaks above resistance, attracting buyers, and then reverses lower, leaving longs in losing positions.

Price breaks through a well-observed level on feeble to moderate volume, shows little continuation, and the next candle closes again within the previous range.

Traders who are waiting for confirmation look for above-average volume and a powerful candle close to confirm the move. Without these signals, the risk of falling into the trap increases dramatically.

Derivatives often signal problems early. When funding rates swing sharply upwards (longs pay shorts) and the open interest rate (OI) builds near resistance, positioning becomes crowded: the perfect setup to put pressure in the opposite direction.

If price breaks above resistance during funding and OI balloon highs, treat the breakout as suspicious until the level is retested and held. After the initial rally, well signs include funds cooling and OI recovering in the retest. If instead the open interest rate develops and the price falls below the level, the breakout will likely fail.

The basic rule of confirmation

• Wait for a close on a higher time frame (four hours or daily) above the level

• Look for a successful retest that will work

• Expect increasing volume in the break and constructive volume in the retest.

If any of these signals are missing, assume an increased risk of a bull trap and keep your position size miniature.

Bear Traps: Shakes Below Support

A bear trap occurs when price breaks below a widely watched support level, pulls traders into a tiny position, and then reverses sharply upwards, forcing covers and squeezes.

A quick push below support (often just a wick), followed by an aggressive rebound and a powerful return to the range.

Derivatives can reveal early clues. When perpetual financing turns deeply negative (tiny and long) on ​​the downside, the tiny side is congested, creating perfect conditions for a keen reversal.

Track OI: Down color suggests forced exits. If OI recovers as price recovers and remains above previous support, tightening conditions are likely to form. Liquidation cascades often mark the lowest level. Once these are exhausted, the price may bounce back and trap slow shorts.

How to confirm

• Resolute recovery: Close above support on a higher time frame (four hours or daily).

• Structure shift: The next pullback creates a higher low above the recovered level.

• Improving participation: Volume and OI are stabilizing or based on recovery, not decaying.

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

Did you know? The Crypto “Weekend Effect” is not just folklore. Studies show trading volume on weekends is 20%-25% lower than on weekdays.

Using fingerprinting: financing cascades, alternative investments and liquidation

• Financing (perpetual): Futures contracts do not expire, so exchanges employ periodic financial payments between long and tiny positions to keep prices in line with the spot market. When funding turns strongly positive, longs pay shorts – usually a sign of crowded longs. Deeply negative financing indicates the opposite: crowded shorts. Extreme readings often precede mean-reverting moves.

• Open interest: OI measures the total number of derivatives contracts outstanding. When OI increases to a key level, greater leverage will be at risk. This adds “fuel” to the squeeze if the price reverses. A keen OI color during rapid movement signals forced de-risking or liquidation. If price recovers quickly while OI recovers, the risk of being trapped for slow entrants increases.

• Liquidation cascades: Leveraged positions are automatically closed when margin ends. When the price reaches a clustered stop or liquidation level, forced selling or buying accelerates the move. It often returns to normal when excess leverage is removed. This snapback leaves the classic bull or bear trap mark repeatedly seen in Bitcoin (BTC) and other major assets.

• How to employ it: If financing is very positive and OI encounters resistance, treat an upward break with skepticism. This usually signals a risk of a bull trap. If funding is deeply negative and OI has just dropped below support, be careful when shorting. This often indicates a risk of a bear trap. Combine these readings with retests and holds on longer time frames and confirming volume before increasing position size.

Order book and news say: When “breaks” are not what they seem

Slender books make it easier to make false moves. On weekends and after business hours, liquidity and depth decrease and spreads widen. A single move can push the price beyond the obvious level, only to fade away upon retest. Kaiko data showed that Bitcoin’s weekend share of trading volume will fall to 16% in 2024. This is a sign of thinner books and a higher risk of slippage.

Beware of parodies, massive offers or inquiries that disappear after contact, creating the illusion of support or resistance. Spoofing is illegal in regulated futures markets, and similar patterns have been documented on cryptocurrency exchanges. Sudden changes to the order book should be approached with caution.

Catalytic windows can also disrupt price action. Auctions and token unlocks can temporarily overwhelm shallow market depth, especially for illiquid altcoins. This can cause keen “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 false heads.

Two-step rule: wait for retest. If the “broken” level is recovered and maintained with better participation (volume or depth), it was probably a trap. If not, you’ve avoided chasing noise.

Summary: A pre-trade checklist to avoid pitfalls

1. Test again and hold: False breaks often fail on the first retest. Treat any breakout or breakdown that has not been retested as suspicious.

2. Confirming participation: Look for above-average volume and increasing width. Impoverished follow-through means a greater risk of being trapped.

3. Derivatives context: If funding is highly positive or negative and OI climbs to a certain level, positioning is crowded. This creates the main fuel for compression in the opposite direction.

4. Liquidation context: After a quick wick and cascade, avoid pursuit. Snapbacks are common when the forced flow is clear.

5. Timing and catalytic converters: Outside of business hours and on weekends, books are thinner, and offers, unlocks and headlines can distort the price. Let the retest decide.

6. Proof in higher time frames: Prefer a four-hour or daily close above or below the level followed by a successful retest before upsizing.

7. Define invalidation: Know exactly where you’re going wrong and adjust your positions so that a confirmation failure is a miniature loss rather than a portfolio event.

If your setup cannot pass this checklist, skip it. There is always another trade.