What Is Bear Trap?
Also known as: Bear Trap Pattern, False Breakdown
In short
A bear trap is a misleading price move in which the price drops below an important support level, giving the impression that the decline will continue, but soon reverses upward. It causes losses for investors who sell or open short positions on this breakdown.
A bear trap usually develops like this: the price breaks down through a support level that many investors are watching. This breakdown triggers stop-loss orders and leads to short positions being opened in expectation of a decline. However, the selling pressure is not as strong as expected; buyers step in and the price rises back above the support level. Short positions being forced to close can accelerate the rally (a short squeeze).
For example, a coin holds support around 100 dollars for months, then one day drops to 95 dollars and comments that the decline will deepen spread on social media. If the price rises to 105 dollars a few hours later, those who sold in the drop and those who opened shorts have been trapped. In the crypto market, low liquidity and high leverage use can make such moves more frequent.
It is not easy to tell a bear trap from a genuine breakdown. Analysts look at whether the breakdown is supported by trading volume, whether the price closes below support, and at divergences in indicators such as the RSI. The opposite of a bear trap, a bull trap, forms when the price falls back after breaking resistance to the upside.
Last updated: · This content is for information purposes only and is not investment advice.