What is a Bear Trap?
Investing in or trading the markets is a great way to increase your monthly incomes. However, trading involves the use of different strategies, not all of them nice for the other traders.
Traders and investors lookup for their finances, even if they have to trick others into obtaining the upper hand. One of these strategies is the Bear Trap.
What is a Bear Trap?
A Bear Trap, in terms of trading, is a strategy that institutions use to take advantage of the young traders that don't have the insight to recognise when they are being played. It consists of creating a false signal in the market, indicating that an asset is going to start losing its value.
The unsuspected traders, considered bears, would try to sell theirs as fast as they can to avoid losing money, thinking that they can repurchase them later at a lower cost.
This movement creates a high demand for the stock (or other assets), and before traders suspect it, the price doesn't fall but rises, and continues to increase because of the generated demand of the sudden sells.
When are bear traps common?
Bear Traps are more frequent whenever a stock starts to have an increase in the demand after a breakout on its value. It is the way that the institutions try to regulate the stock price and its market. You can see that the same behaviour will appear in the intraday stock charts, so it is essential to be careful.
Although this phenomenon is most often talked about in the stock market, it works the same on all asset classes. Similar manipulations happen on all timeframes and in all markets.
Moreover, the same can happen in the opposite direction, known as a bull trap.
How to avoid falling into a Bear Trap?
Experienced traders are more attentive with these false signals, which help them avoid the trap entirely and even take advantage of it later. It can be difficult at first to recognise a bear trap if you're still very new into trading.
However, there are some strategies and tools that you can use to see the threat and ignore the impulse of selling.
If you want to be sure that a declining signal is real or a fake one, you should watch the trends of that stock closely and study how it has behaved in recent events or similar situations. An abnormal decline in the stocks could mean that it is false.
Other traders use analytics tools to compare with the information that they have investigated, that way they can have enough base to predict the movement of the stock and recognise if there is an attempt to make a bear trap.
If you don't have much experience in trading, you may fall in one of these traps. New traders get nervous when they see the price of a stock they have invested go down, while bear traders don't want to miss the opportunity to sell and repurchase the stock once it is lower.
Although short selling is a good strategy, it is essential to pay attention to the signals, to detect if you are before a Bear Trap or not.