What is a Bear Trap?

If you’re already read our Bull and Bear Markets article then you’ll have a good understanding of the two concepts. In this follow-up article, we’ll explain the term bear trap and how it relates to cryptocurrency trading.

Bear traps are events where misleading market indicators give investors the signal that now is the time to sell. To the trader’s surprise the market ends up doing the opposite — they’ve been lured in and have fallen for the trap.

Technical analysis is one of the key tools short and medium-term investors have at their disposal. Cryptocurrency traders analyse price patterns and look for signals in the asset’s price chart in order to predict future movements.

When attempting to predict the course of a price trend and manage their risks, analysts look at multiple indicators — this will give them a proper confirmation that their instincts are correct. One of the outcomes they look for is a breakout — when the price goes above or below a trend line that has been repeatedly hit but never breached before. This method can sometimes yield good results, but when the initial signal turns out to be false, traders are lured in trading based on their hunch.

A bear trap occurs when, initially, the market is in an uptrend — a bull market. The price the cryptocurrency then shows a rapid decline below the support line, giving traders the impression that a bear market has started. With the perception that the market has reversed, investors choose to sell their holdings for some returns with the plan to buy again later on. Unfortunately, when the market returns to its initial trend, the investor realises that they have made an unconfirmed transaction. As the phrase implies, investors who sell are trapped in their transactions because of the misleading signal.

Watch “Risk Management with Murat Tufan” to get a better understanding of how to manage your risks when investing in Bitcoin and other cryptocurrencies.





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