All you need to know about Bear Traps

In a bear market, prices usually fall over a period of time, giving traders an opportunity to make profit by taking short positions.

However, if the market does not fall and rather turns around, the bears run to cover their shorts. In other words, bears are said to be trapped due to false signals. Let’s delve a bit deeper into this market phenomenon and learn how one can avoid it.

The highlighted area on the chart is a Bear Trap. The stock ended sharply lower, down 3% from the day’s open after a gap-up, indicating selling pressure at higher levels. In the following 3 trading sessions, the stock corrected almost 12%; this boosted the confidence of bears. After getting around 10% profit, the bears anticipated further fall at the counter. However, the bears got trapped as there was no follow-up selling

Simply put, a ‘Bear Trap’ is a false indication of a negative reversal, which appears to be weak with corrective moves that lure short-sellers, but then the prices see a steady recovery. 

A 'Bear Trap' tends to have a significant impact on not just the trading portfolio, but also on the traders mindset.

To build steady profits while trading, consistency and ability to digest losses is a must. Every trade may not give the perfect turnaround, as predicted; in cases where the trade seems to go wrong, exiting with minor loss should be considered as a viable option.

But, it is not easy to spot a bear trap at the onset. Here are a few hints that can help one avoid a Bear Trap. (Read out the above pointers)

Lastly, trading is all about developing strategies and trading principles. The most notable features of successful traders are patience and consistently following one's strategy. Instead of considering a larger gain from a stock, it is better to have a safe trade that can gradually broaden one’s trading skills.