Crypto markets keep on fluctuating. The volatility in the value of cryptocurrency contributes to changes in social, economic, and regulatory conditions. A Bear Trap is one such case, in which the price of financial assets encounters a steep decline for a short period and then reverses to an upward trend. Read on to learn what a bear trap means in crypto, how it works, and more.
Table of Content
- What is a Bear Trap?
- How a Bear Trap Occurs?
- How Does Bear Trap Affect the Crypto Market?
- How to Identify a Bear Trap?
- How to Avoid Bear Trap?
Key Takeaways
- A bear trap is a false technical indication of a downward trend market reversing to an upward trend within a short span.
- Technical analysis, indicators, and trading volume can be used to identify a bear trap.
Bear Trap
A bear trap is a false technical signal showing a downward trend in the price of crypto assets misleading traders to transfer or sell their investments before a further drop. The drop doesn’t last for long, instead, it suddenly reverses and peaks upward, creating a trap for the investors who sold their investments in the fear of further downfall.
The bear trap depicts the complexity and uncertainty caused by uncertainty in selling momentum necessitating the need to understand the market risks before making a trade.
How a Bear Trap Occurs?
A bear trap involves many traders with a large amount of combined crypto holdings. They sell a subsequent amount of a particular coin at the same time, resulting in a large fluctuation in price, making other investors think that a price correction is taking place. In response, they sell their assets, creating an even decline in value.
The decline in value is utilized by the earlier sellers, they buy back all their assets at a lower price. This results in an increase in demand, and the value of the coin projects an upward momentum. The traders who set the bear trap gain large profits.
How Does Bear Trap Affect the Crypto Market?
Volatility in price is inevitable in the crypto market. Though new investors are often caught out by the price volatility, a bear trap can trap even an experienced player. A price reversal can create volatility in the market, benefiting short-term investors and creating a ruckus for the other majority.
In a market with an upward trend, a sudden downward reversal can create high volatility, forcing investors to use a short-term investment approach and liquidate their long-term investments.
This bear trap makes bearish investors believe that the downward trend will continue for a long period and that it is better to sell the product at an offered price before a further downfall.
How to Identify a Bear Trap?
A bear trap can be identified using different methods.
1. Technical Analysis Tools
A quick reverse in price after a security breaks below a significant support level and the price rebounds steadily after breaking the support level is a situation of a bear trap.
2. Trading Volume
By analysing the anomalies in trading volume a bear trap can be identified. A decline in price without a parallel increase in trading volume indicates a void of conviction among sellers. This indicates a bear trap and can be confirmed if a sudden reversal, resulting in an increase in trade volume and a decline in price occurs.
3. Technical Indicators
Relative strength indicator and Stochastic oscillator indicate a condition of overselling before a bear trap. A security overextend, hammer, or bullish engulfing pattern after a downtrend allows one to foresee a bear trap.
How to Avoid Bear Trap?
Bear traps are often encountered due to some common mistakes made by investors. A user can avoid getting bear-trapped by avoiding these mistakes.
1. Implement Stop Loss Feature
A stop loss is an automotive directive that protects a user from extreme losses while selling an asset that has a value higher than a predetermined price. It helps a user from encountering significant losses in a market steep.
2. Focus on Objective
In a market like crypto where volatility is an inevitable factor, investors must keep their objectives straight without being influenced by emotions. This prevents making spontaneous decisions and prevents bear trapping.
3. Stay Updated
Continuous following of crypto news by utilizing social media platforms and crypto forums helps to stay updated and avoid falling into fake alerts that cause a bear trap.
Also Read: Bull vs. Bear Crypto Markets Explained: Tips For Success
Final Thoughts
A bear trap is a method adopted by largeholders to increase the profit of their holdings. They create a false alert of a downtrend of assets making other investors sell their assets at lower prices. A bear trap creates large losses for investors.
By using technical indicators, analysis tools, and tradic volume monitoring investors can identify the bear traps in a market. Stay updated about the crypto market to prevent falling from bear traps.
