Ever been caught off guard by a sudden trend reversal? The market signaling a downtrend initially but switching and rising again? This is called as a bear trap.
Bear trap is a term that's used to describe a market downturn. It is, however, a trap. Instead, the market rebounds into steady growth after a brief pause. Beartrap can occur in any market, stocks or indices.
Although the impact of a bear trap's effect can be varied, one thing is certain: traps are deceptive. Technical traders can use different trading tools in order to identify bear traps; we'll discuss them later.
Markets use bull and bear to denote two opposing market sentiments. A bullish trend is when the market rises with dominant buying forces. It is the opposite, which is when the market falls mainly because of a selling spree.
Most traders will be inclined to one side or the other of the spectrum. This is why you can have traders trading in both bullish and bearish markets. Bearish traders will seek price patterns that indicate a downtrend to short sell and exit trades in order to make profit.
A bear trap is an abrupt stoppage of an uptrend. Bearish traders may view the situation as a sign of a downtrend, and might engage in short selling. This happens when traders sell short positions when stocks are falling and try to buy them back at a lower cost. However, the trend reverses itself and goes up. It can lead to a trap and then a sharp rally.
It is easy to identify a bear trap on the chart. It is located close to the support level. A downtrend is associated with a large volume trade. If the trend reserves are within five candlesticks and forms above the support level, it is a trap. The trend quickly crosses the resistance level. A stock must also have a reasonable price range. The asset's price range should be wide to increase trading opportunities.
Bear traps lead traders to believe that there is a downtrend and that the value of the financial instrument will fall. The asset's value remains flat or worse, it rallies. In this case, you would have to take a loss. Bullish traders may choose to shorten to buyback when prices fall to a certain point, while bearish traders may opt to shorten to take a position in declining asset prices. In a bear trap, however, the trend reversal occurs in the opposite direction.
A bear trap is a popular tool for short selling or short trading. To make a profit, shorting involves selling high and then buying the same asset at a lower price. Bear trap trading allows you to shorten in several ways, such as borrowing stocks from the broker on margin. If you anticipate the market falling, you sell the shares at current prices and then buy back at a lower price to pay the broker. Your risk is increased by shorting in a bear trap. You pay more for stocks when the price rises instead of falling. This can lead to you repurchasing stock to keep your margin. Bear traders are more at risk than bullish traders when there is a bear trap.
To distinguish a true trend reversal from a bear trap, traders use multiple technical trading tools, such as Fibonacci Retracement and relative strength oscillator. You should not jump to conclusions if a bullish trend is suddenly disrupted by a downtrend. Instead, check the market parameters to determine why. It is likely a bear trap if there is not a significant change in market sentiment that causes a reversal.
Market volume is an important indicator that can help you spot a bear trap before it happens. To indicate changing sentiment, market volume can change significantly as a share price approaches a new high or low. If there is a price fall but no significant increase in volume, it is most likely a trap.
Fibonacci bands can also be used to give you an early warning. If the share price does not cross the Fibonacci lines then the trend reversal will likely be short-lived. You can look at the indicators if you notice a sudden downtrend. You can easily spot a divergence on a chart using indicators.
Stocks often rally after a bear market, which is often caused by short-term traders trying to profit from the falling market. When the majority realizes that the uptrend is not just a dead cat bounce, the second wave occurs. The second wave is usually stronger than the first and often surpasses the short-term top.
Bear traps are false trends reversals patterns that can occur in any market.
- It tricks traders into opening short selling positions, which then loses value
- The bear trap is a common phenomenon in the equities and bonds markets, as well as futures, futures, currencies, and futures markets.
If they misinterpret the trend, trading risks for short traders will be greater during a bear trap that for bullish traders.
Technical charts can be used to help you identify bear traps in advance
- A divergence from a bear trend can signal a potential end to a bear market.
Place a stop-loss order to minimize your losses
Bull traps can also be found in the market but their function is reversed
You can't avoid a bear trap. It can be difficult for inexperienced traders to spot a bear trap on a trading chart. With the help of market indicators and experience, you can learn to spot a trap. Always use a stop-loss if you are in a downtrend. This will ensure that you don't lose more money than you plan to.