What Is a Bear Trap in Trading and How to Handle It?
What Is a Bear Trap?
A bear trap is a technical analysis term used on Wall Street when a stock or security falls below a support level, only to rebound shortly thereafter. This creates the illusion of a buying opportunity, enticing traders to buy into the security, which then quickly reverses and falls further.
If the price of a stock falls and it is below its support level, traders will want to buy it because they think the price will keep falling. But if the price rises for a short time and then falls again, they might lose money if they miss this opportunity.
Bear traps typically occur when there is bad news or earnings releases that cause a short-term decline in the price of a stock. Traders who are not paying attention may buy into the security at the lower price, only to see it rebound and fall even further.
The bear trap happens when the market falls. It can happen with any type of asset, like dollars, cryptocurrency, stocks, or indices. It's hard to trade for this reason because traders need to be careful all the time they trade.
How to Handle a Bear Trap
The best way to handle a bear trap is to avoid getting caught in it in the first place. This can be done by being aware of key support and resistance levels, and by paying attention to the news and earnings releases that may cause a stock to fall.
If you do find yourself in a bear trap, the best course of action is to sell your position immediately and cut your losses. Trying to hold on to a position that has just fallen through a support/resistance level is almost always a bad idea.
Bear traps are common in the trading world and come in many shapes and forms, but they can be avoided by monitoring your positions and staying informed about what is happening with the markets and individual stocks.
Why Do Traps Happen?
Many reasons behind the bear trap happens on the chart. One of them is that bears cannot pull the price down anymore. That happens because of these things:
The first reason is when something good happens. For example, a politician might give a speech that changes people's minds, or an important economic actor might say something that makes people want to buy more.
There are no people who can predict about politicians or financial leader’s voice. But, when they talk in a positive way, the price of stocks will go up.
If the market has a strong uptrend, then there are high risks of a bear trap. If you have a lot of money in stocks, then watch out for the risk of getting trapped.