Sure, you have already heard about the bear trap. The phrase bear trap refers to a specific trading signal. The pattern appears when an asset price falls below significant support levels, only for the asset to reverse and shoot even higher. It seems like a fake-out. Traders and investors think that the price will continue to fall, but only to see that it is the other way around. Bear trap describes this reversal. And in more cases, it results in a significantly stronger surge in the price of the actual underlying asset. Therefore, it is wise to resist the bear traps. The last person you want to fall into this trap is yourself. So, let’s explore it a little bit further.
Why do bear traps happen?
Bear traps happen when there is an existing bullish trend in the market or bullish sentiment. Bullish is the opposite of bearish. When there is an overall bullish sentiment, what we will see is the price begins to drop as institutional investors or the veterans in the market start to book profits.
When you start booking profits, selling pressure increases; consequently, the price keeps falling. Due to that, most people will think that it is a sign of a trend reversal from bullish to bearish. Bearish traders will look for a top formation. They will believe it is only downhill from here and start to enter positions.
These traders might wish to short sell the market if they believe it is overvalued or a trend correction is about to occur. Well, the problem is it is a mistake. The reversal is a mistake. Bearish traders enter the market hoping to ride the wave of liquidation by small traders, only to find out that the market is still in the bull trend, and the price shoots right back.
What does a bear trap look like in a chart?
You will see it at a decreasing price or within a specific range. There is a support line, and the price dips down below it. It rockets back above as soon as it crosses the support line. It is the movement you may want to look at when spotting a bear trap.
But not every single scenario similar to this is a bear trap. Every time the crypto goes below the support level, we cannot say it will automatically go back up. Because if it is that easy to identify, we will all be millionaires. What you are looking for are additional significant factors that will tell you whether it is an actual reversal or a bear trap. And one of the vital things you can look at is the market volume.
How to Spot Bear Traps
How much volume is present? How many cryptos are now getting traded? And how many of these assets are there compared to the daily averages over the previous 60 to 90 days? Market volume is one of the most crucial components for identifying bear traps versus an actual reversal or liquidation event of all the assets. When you see a market-changing direction despite low volume, that is a signal of a potential bear trap.
If you see a price drop on the asset you are tracking, there are two things you want to check. First is the volume. Is it below the average traded volume over the last couple of days or months? And the second thing to look at in the news. Why is the price dropping? Is there news or external factors that can justify the sharp reversal in trend? If the answer is no to these questions, it is possible that what you’re seeing is a bear trap. And it may not make sense to buy an asset or ride that trend down. Being a contrarian and opening a long, bullish position on that asset may be a good idea at this time.
And to do that, the next smart move is going to crypto exchanges or brokers. Crypto exchanges are very accessible compared to brokers. That is why most beginners sign up to trader-broker connecting platforms, such as Bitcoin Up to filter all available broker platforms in the market. It needs another article to discuss which one is better between the two. But most experienced traders believe crypto brokers are better for beginners. With their help, you may find it easier to detect red flags like bull traps, potentially taking you away from bad trading decisions.
Closing Thoughts
When does a bear trap happen? Traders must be very vigilant to bear traps. Try to identify it on time because it may occur in just a blink of an eye, in a few minutes, or in a couple of days. It can hardly be known. Instead of accepting things at face value, you should look for additional information that will enable you to make a better-informed decision or secure a more educated position.
