A bear trap is a market pattern that occurs when the asset price breaks suddenly below the support level, only to reverse immediately. This pattern incorrectly shows prices reverse to a downward trend, only for the market price to take a flat or even continue with its uptrend. Bear traps often occur when the coin price is just close to the support level.
A bear trap is quite the opposite of a bull trap. A bull trap occurs when the asset suddenly surpasses the resistance, making investors purchase assets only for an earlier downtrend to continue.
How it Works
In many cases, large-scale institutional traders are the main causes of bear traps. They dump coins until the prices start plunging.
When the prices start falling, investors think that the trend will continue for a long time. Hence, they enter short positions, by selling their assets planning to repurchase them when the prices are lower. Most bear trap traders, especially amateurs, will go shorts since they think the asset prices will drop.
The institutional traders now stop selling but instead buy the assets. Immediately the trend reverses, and the prices remain higher than the support, or even the earlier uptrend continues. The bear traps result in sharp price rallies. The investors, therefore, end up in a bear trap that drives them to losses.
How Can You Avoid Bear Traps?
As a trader, bear trading can have a lot of benefits. However, as mature traders, you might run the risk of falling into a bear trap. So how can you protect yourself from the trap? Here are a few things to do;
- Never sell on short positions during such bears. If you want to, use stop-loss orders which will help reduce your losses.
- Invest longs on highly trusted crypto assets. Work with assets like bitcoin and Ethereum that survive long bears.
- Analyze the trend. When you notice such a sudden trend, do not rush to put your money, but instead do technical analysis. Check the indicators, the buy/sell situation, and volumes.