What is a bear trap? Meaning in crypto | CoinCasso Exchange
What is a bear trap? Meaning in crypto

In our last article, we’ve been talking all about bull traps – what are they and how to not get caught. The main topic of our today’s blog post is a bear trap – what is this technical pattern, what does it mean for cryptocurrency traders, and how to avoid it. Read on to find answers to all your questions on bear traps!

What is a bear trap?

This technical pattern can happen in all kinds of markets: futures, stocks, bonds, currencies, and cryptocurrencies. To put it simply, bear traps are fake signals for the upward trend changing to a downward trend. Even though the price action that precedes the actual bear trap can last for months, the trap itself often happens in a blink of an eye. After the price goes down, it recovers in the near future and creates a bear trap. Bearish investors open short positions believing that the market sentiment will soon experience a reversal. However, in reality, bears get trapped and risk losing their investments in the long term if they don’t sell their assets.

What does the bear trap mean in crypto?

The crypto market is highly volatile and changes all the time. While cryptocurrencies have already won the reputation as the digital money of the future, their value still fluctuates heavily and causes rapid changes in tokens’ prices. Bear traps in crypto are the short-term trend reversals. The market is bullish, then turns bearish for short time, and, finally, recovers to bullish again.

So, how do traders behave in such market conditions? In a bullish market, the prices are going up. If bulls stop buying coins or trading long even for a brief moment, the value starts decreasing because the supply gets larger than the demand. Shortly, the price breaks the support levels. Unexperienced traders may take this move as a beginning of a bearish trend and go short. And this is a beginning of a bear trap pattern – investors open short positions and expect to gain a profit because the price of an asset is falling. This may be true for a short period of time but looking at the broader image, the situation is quite different.

In reality, the downtrend doesn’t last long and the uptrend makes a comeback locking bears in a trap. From a long-term perspective, they might lose all their investments because the market sentiment recovers to a positive one.

Bear traps – examples

Below, we’ve prepared a few screenshots that illustrate what a bear trap looks like on a chart.

Bitcoin bear trap. Taken from TradingView
Bitcoin bear trap. Taken from TradingView

On the BTC/USD chart above, you can see a bear trap marked with a yellow circle. This pattern occurred between the 19th and 26th of August 2021 – a rapid change in a coin’s value. BTC decreased from around $32,000 by more than $2,000.

The market sentiment has been positive at least since the end of May, as it’s shown on the screenshot. Since the end of June, the price has been quite unstable eventually resulting in a bear trap. From approximately the 20th of August, the BTC value started rising again and the price reversal never happened.

Bear traps. Taken from TradingView
Bear traps. Taken from TradingView

 

Our next example is from September-October 2021, and here you can observe a few bear traps. From the 20th of September till the 4th of October, a new bear trap was happening every few days. In the end, the price reversal also didn’t happen and the BTC returned to the bullish trend.

How to identify a bear trap?

Bear traps, just like bull traps are the natural parts of the market cycle. In cryptocurrencies, they happen with all coins and tokens, including Ethereum and Bitcoin. Fortunately, plenty of technical indicators can help us predict the coming bear traps and avoid them with minimal risk. Let’s have a look:

  • low volumeLow trading volume is a distinct sign of a lack of interest in coins in general. It’s not the best time to make major adjustments to your investment strategy or buy/sell assets hastily.
  • price actionIf price action shows that a bear market is over, it’s not wise to go against the technical indicators and open short positions.
  • Fibonacci LevelsThis indicator is for more advanced traders as Fibonacci levels are used to draw resistance levels and support lines, set target prices and orders, etc. If the price doesn’t break the Fibonacci levels, a trend reversal is unlikely to happen. Nevertheless, minor breaks here suggest trend correction rather than a price reversal.

What I should do?

A bear trap is not all that scary if you know how to protect yourself. This pattern is just one of the stages in the market cycle and, thus, cannot be ignored or unnoticed. Here’s our piece of advice on how to avoid a bear trap:

  • First of all, keep an eye on the technical indicators we’ve discussed in the previous section. They provide real data on the cryptocurrency market and come in handy when deciding on your next trading move.
  • Secondly, explore alternative trading strategies. One of them is purchasing put options that guarantee a specific asset’s price at a specific time.
  • Thirdly, if the market goes up, avoid creating short positions not to get caught in bear traps.

Bear trap vs bull trap

These two technical patterns are quite similar – both are short-term wrong signals about price reversal. A bull trap happens when the market is bearish and there’s a quick price spike. A bear trap, on the contrary, takes place in bullish markets and is the rapid slurp in cryptocurrency value.

Both traps are natural for the market but quite tricky for inexperienced traders. Luckily, they can be avoided by paying close attention to a number of technical indicators, trading volume in particular.

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