What is a bear trap
The bears in trading some assets, including cryptocurrency, are called sellers who play on falling prices. The concept is purely arbitrary, since any trader will situationally both sell and buy.
A bear trap is a pattern on the price chart that occurs after a downward movement. The meaning of the figure is that when the local minimum is reached, the minimum is broken.
At this moment the bears get a signal to sell.. However, it is only a fiction.. The price reverses and immediately starts to rise.
The formation of a bear trap is usually accompanied by a strong support level. After it can be reached and broken downwards, there is a signal to sell.
However, this is a trap.. After a while, the price returns to the support level, which has now become resistance, breaks it from the bottom and starts rising.
For example, in January 2023 bitcoin was steadily growing. In early February, BTC corrected to the area of $21,350-$21,450.. Thus, the resistance level was formed.
After that, BTC started to grow again, exceeding $25,000 in the 20s of February.. A correction followed. The support level for this would have been around $21,350-$21,450.
Nevertheless, on March 9, bitcoin plunged lower, signaling that the bears are in charge and further declines are to be expected;
But not there was no such thing.. Already on March 11 March bitcoin began to grow, and March 12 passed the level of $21 450.. That’s how the bears got trapped and had to liquidate their positions.
In addition to the bear trap, there is also a bull trap.
What is a bull trap?
It is the opposite of a bear trap on a chart. The victims are not the sellers (bears), but the buyers (bulls).. The bullish trap itself occurs after the rise of cryptocurrency quotations.
It usually occurs when the price reaches some level of resistance and breaks it.. The moment for shopping comes up.
Many bulls take advantage of this and start buying cryptocurrency. However the trend immediately changes: the price returns to the level and continues;to decline. The bulls are in loss in this case.
Here’s a real-life example. For the first 20 days of 2023, ETH rose in price, reaching $1 671. After that there was a lull in the form of sideways movement.
That lasted until on Wednesday,February 15 the ether closed above $1 671.
However further events showed that it was just a trap for the bulls. There was no impulse growth.
After six days above the level, the ether dipped below $1 671 on February 21 and began to decline.. Short-term bulls had to close their positions.
How to find a trap and not get caught in it
In terms of 100% probability, there’s no way. The formation of both a bear trap and a bull trap is post factum.
Once the price rises or falls below resistance or support, we can t predict anything. You can’t see ahead of time what will happen to the price.
At one moment we only get a buy signal in case of a bull trap or a sell signal in case of a bear trap.. It is only after a lapse of time that we see the result.
However, there are a number of tricks that can reduce the likelihood of loss. The first and probably the most efficient method is trading on larger timeframes: daily, weekly, monthly and so on..
The shorter the period of your trade, the more traps will arise. As for the investors who mostly use the fundamental analysis, they have the least risks.
The second thing you can do is to pay attention to volumes.. If the level breaks at low rpm, then this is a reason to think about the occurrence of a trap.
If, on the contrary, the level breaks through on high volumes, then most likely, the trend will continue.
You can also use different technical methods: oscillators, Fibonacci levels, candlestick analysis. All of them can give specific signals not to get into trouble.
In cryptocurrencies, this is especially important in view of high volatility. If you go short in bitcoin and get into a bear trap, you risk losing your whole account.
Keep in mind that there is no one-size-fits-all solution for every situation.. It depends on your trading style.
How to make money on traps
Again: who trades how.. If you’re scalping – ultra-frequency trading – traps simply won’t be taken into account.
Their formation will take too long. You just can’t afford to wait that long.. While the trap is forming, the scalper can take profits several times on intraday price movements.
The investor – the one who trades long term – also won’t pay attention to the traps, because they are just noise to him. The long-term investor will wait as long as it takes and come out in the black.
Inexperienced traders who are just getting acquainted with the crypto markets are more likely to fall into the trap. It’s also where medium-term traders can get trapped.
Again, it’s not a question of whether you fall into a bull or bear trap, but whether your risk management system is effective and what kind of losses you will incur.
Remember, it’s unrealistic to always and everywhere make 100% profits. At some point, everyone loses.
In short, bear and bull traps are standard patterns in the crypto market. They are formed only after a strong trend movement. It is impossible to detect them in advance with one hundred percent probability.
This material and the information in it do not constitute personal or other investment advice. The opinions of the editorial staff do not necessarily reflect the views of the author, research portals and experts.