A Bear Trap is a false bearish signal within a bullish trending market. Basically, this price drop leads investors to believe that the market is undergoing a reversal from bullish to bearish (a bearish trend phase). Investors, in order to minimise their losses, are led to exit the market immediately, selling their assets.
However, after a brief descent, the market continues in a bullish trend, causing investors to miss out on potential gains.
The term Bear Trap owes its name to the Bear Market, a market phase characterised by a generally negative trend.
The Bear Trap is a trap in all financial markets, including cryptocurrencies and traditional instruments, and is not to be confused with the Bull Trap, a bullish trap in a bearish trending market.
It is not possible to accurately predict market movements, but in general there are some recurring causes that can generate a Bear Trap.
These traps can be caused by trades of the same type made simultaneously (or within a short period of time) by a group of investors. If several traders sell an asset, its price will fall due to the law of supply and demand. This movement could generate a Bear Trap and push other traders out of the market.
How to recognise a Bear Trap? Although there is no foolproof statistical tool or mathematical formula, it can be useful to conduct a careful technical analysis of the market.
For example, to try and spot a Bear Trap, you can look at the trading volume of an asset, i.e. the sum of the quantities sold and bought in a certain period. When a market is clearly entering a bearish phase, most institutional investors will try to exit the market by selling their securities. As a result, an increase in trading volumes will be observed. If, on the other hand, the trading volumes of an asset remain unchanged, we are probably facing a Bear Trap.
The financial market, however, is impossible to predict: it is important for every investor not to be overwhelmed by their emotions, and to carry out an analysis based solely on factual data before each trade.