What is a Bear Trap?

In the world of trading, there are quite a few acronyms one needs to take into account. Even people who do not rely on technical analysis for price predictions need to pick up on the slang sooner or later. One of the more common terms used by experts is a “bear trap”. As the name suggests, this is a false signal indicating a downward price trend for a specific asset or currency. Bear traps are quite common in the Bitcoin world.

Beware of the Bear Trap When Trading Bitcoin

In any financial market, there are those who act as “bears” and those who act as “bulls.” The bulls are the people looking to drive up the price, either based on solid evidence of speculation. In the Bitcoin world, there are quite a few bullish investors who feel the price per BTC will continue to go up over time. However, they are also aware the price will go through some hiccups along the way. Some of these hiccups are known as bear traps.

The name suggests, a bear trap is a period of time during which the price of an asset or currency takes a sharp nosedive. Bitcoin’s price chart is filled with ups and downs, albeit not every price drop is necessarily¬†a bear trap. In some cases, traders will deliberately favor false signals to indicate the upward momentum of any commodity is on the brink of reversing. Bear traps often follow very sharp price increases, just like what we’ve been seeing with Bitcoin.

One could argue the most recent Bitcoin price decline is a major bear trap, although it is hard to judge whether or not that is true. it is evident the Bitcoin price has been incredibly bullish for months now, and things can’t go up in value indefinitely without some resistance. Then again, dropping nearly $550 in a matter of hours is quite a troublesome trend, even for Bitcoin and other cryptocurrencies. Luckily, it appears the price is recovering nicely as we speak.

Assuming this downtrend was a bear trap, it is obvious a lot of traders will be quite sad they sold their bitcoins at cheaper prices. Bear traps are designed to force traders to place shorts on Bitcoin or other commodities, as they expect the value to continue to decline over time. However, one should always use keep in mind Bitcoin is not your average trading market either, and things can reverse in a matter of seconds.

People who gamble on bear traps should always use a stop-loss order when trading during times of increased volatility. An indefinite short position on bitcoin or any other commodity will eventually result in smaller profits and even net losses. A bear trap can reverse rather quickly, and going against the market is the last thing any sane trader wants to do during such times.  A brief short position during a bear trap can be quite lucrative, assuming one knows when to get out.

Novice traders will often get caught in bear traps, as they may be unfamiliar with how these things materialize. It is quite easy to get sucked into a bear trap in the early part of this trading spree. However, it also has to do a lot with trading based on emotions, which should be avoided at all costs. Traders always need to avoid making the most common mistakes, especially in volatile markets such as cryptocurrency.

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