Table of Contents
Rather than an actual bear trap used in hunting, a bear trap is a deceptive technical indicator of a market turnaround from down to up that might entice naive investors. Learn more about bear traps in the trading industry in this article.
What exactly is a bear trap?
A bear trap is a technical pattern in which the price movement of a financial asset or product like a coin (cryptocurrency or tokens), stock, index, or other financial instruments incorrectly signals a downward to an upward trend reversal.
According to a technical expert, institutional traders strive to set up bear traps to entice individual investors to buy long positions.
If the institutional trader succeeds and the price increases swiftly, institutional traders can dump more shares, which would otherwise drive prices down dramatically.
But how does it work? Many buyers may be eager to acquire stocks in various marketplaces, but only a few sellers are prepared to accept their offers.
In this case, the buyers may increase their bid—the amount of money they are willing to pay for the shares—to attract more sellers to the market. Due to an imbalance in purchase and selling pressure.
When coins or stocks are purchased, they immediately become a source of selling pressure since investors only profit when they sell. Consequently, if too many people buy a stock, it will lower the purchasing pressure, but selling pressure will increase.
Institutions may cut prices to promote demand and cause stock prices to climb, making the markets appear bearish. As a result, inexperienced investors sell their investments.
When a stock falls in price, investors rush back into the market, and stock prices climb in tandem with the increase in demand.
How to detect a bear trap?
Institutions acquire equities at wholesale prices, frequently after falling in value. Downtrends will reverse, and markets will increase, which is the optimum moment to purchase. Still, most amateur investors and traders will wait until prices are already bullish and then buy.
People are encouraged to purchase breakouts and pursue the price as it rises, which alerts institutions that it may be time to set a bear trap on the stock.
When an increase in volume accompanies a price breakthrough, a bear trap is generally not long behind.
On intraday charts, you can also detect bear traps. A similar pattern is regularly witnessed, with prices breaking out to new highs and institutions selling or short selling to amateurs purchasing the breakout.
It halts the rising trend and sends amateurs into a panic, leading them to sell their stock or activate their stops. When the price falls into demand, the institutions buy to cover their shorts, causing prices to rise, causing amateurs to re-enter the market out of fear of losing out.
How to minimize risk when trading bearish breakouts?
When the price of a stock rises outside of specified support or resistance level with growing volume, it is called a breakout.
A breakout trader takes a significant position when the stock price breaks over resistance, and when the stock price breaks below support, a breakout trader takes a short position. When a stock crosses a price barrier, volatility rises, and prices often trend toward the breakout.
Breakouts are a crucial trading method because they serve as the beginning point for future volatility rises, big price swings, and, in many cases, substantial price trends. Here’s what you can do when trading breakouts for the best result.
Find A Good Candidate
When trading breakouts, keep the fundamental stock’s support and resistance levels in mind. The more times a stock price has passed through certain levels, the more genuine they are and the more essential they become.
Similarly, the longer these support and resistance levels remain in play, the better the result when the stock price ultimately breaks through.
Wait for the Breakout
It is unnecessary to make a hasty judgment when looking for a suitable individual. Wait patiently for the stock price to move. Please wait until after the trading day to make your move when the stock price trades outside its support or resistance level to guarantee that the breakout holds.
Set a Reasonable Objective
When making a transaction, you should know where you want it to go. You won’t know where to leave the trade if you don’t. Accomplish this by computing the average move of the stock or estimating the distance between support and resistance. This is very useful when trading price patterns.