All you need to know about Bear Traps

In a bear market, prices usually fall over a period of time, which gives traders an opportunity to profit by entering into short positions.

However, if the market does not decline but turns around, the bears run to cover their sell trades. In other words, bears are said to be trapped by false signals. Let’s dive a little deeper into this market phenomenon and learn how one can avoid it.

The highlighted area on the chart is the “bear trap”. The stock finished sharply lower, down 3% from the day’s opening after a bullish gap, indicating selling pressure at higher levels. In the next three trading sessions, the stock corrected about 12%; This boosted the bears’ confidence. After capturing a 10% profit, the bears expected a further decline over the counter. However, the bears were trapped as there was no follow-up sale

Simply put, a “bear trap” is a false signal for a negative reversal, which appears to be weak with corrective moves that attract short sellers, but then prices experience a steady recovery.

The “bear trap” tends to have a huge impact not only on the trading portfolio, but also on the mindset of the traders.

For consistent profits while trading, consistency and the ability to digest losses is a must. Not every deal may give a perfect turnaround, as expected; In cases where the trade appears to be going wrong, exiting with a slight loss should be considered as a viable option.

But a bear trap is not easy to spot at first. Here are some tips that can help one avoid a bear trap. (read pointers above)

Finally, trading is all about developing strategies and trading principles. The most prominent traits of successful traders are patience and constantly following one’s strategy. Instead of thinking about bigger gains from stocks, it is better to have safe trading which can expand one’s trading skills gradually.


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