A bear trap is a strategy used in the crypto trading markets where an investor will place a buy order near the bottom of the market and a sell order near the top of the market.
The idea is to trap traders who are buying at or selling at that price.
A bear trap would be an aggressive way to trade because it gets assumed that the price will revert to its original position.
With this strategy, the trader hopes to make a quick profit in a short period and then quit while they are ahead.
Bear trap are not recommended for beginner traders because they require good timing and understanding of the market movement and supply-demand.
Causes Of Bear Trap
Beartrap trades cannot occur in every market. There are two primary causes of bear traps:
1. The lack of liquidity
A bear trap happens when there isn’t enough supply or demand to allow the price to fluctuate between buying and sell orders.
This problem can be resolved with more liquidity and an increase in volume.
The increase in volume will allow the price to change rapidly, allowing for a better payoff for both sides of the trade.
2. The price is not correcting the movement of the price
It causes a bear trap because the price may hit a low for the period, but it won’t immediately rebound.
It prevents traders from making a profit because they sell higher than anticipated or buy below their expected purchase price.
For this reason, some traders will use different strategies to avoid the bear trap by making sure the trend continues and doesn’t stop at any given point in time or move in one direction for an extended amount of time.
Ways To Avoid A Bear Trap
There are different strategies for avoiding being caught in a bear trap. Some traders have other methods how to avoid bear trap:
• Use Alternative Trading Strategies
One way to avoid a bear trap is to use an alternative trading strategy such as zone trading. It is when an investor places a buy order and then sells on a different part of the market.
If that investor does not want to put sell order, they will sit on the trade and wait for the price to bounce back up in anticipation of a profit.
• Set The Price
Another way to avoid a bear trap is by setting the price.
If you are thinking of purchasing a coin at a specific price, you should wait until that price has bounced up by a significant amount or doesn’t move at all to be safe from losing money.
• Trade At Different Times Of The Day
Traders can sometimes use different strategies to avoid being affected by a bear trap.
For example, if you are a morning trader and are used to trading during a specific time of the day, then sometimes it is best to trade during another time of day because you know that the price may move in a completely different pattern than what you anticipated.
• Check The Volume
If you are thinking about making a purchase and you see that the price hasn’t moved in either direction, then it is best to research why there isn’t any volume moving in one direction or another.
If you look at the book and find that there isn’t enough supply or demand, this may signify a bear trap.
Pros
• Very profitable if profited on quickly enough
This strategy can be very lucrative when you get lucky or use alternate trading strategies.
When traders are not watching the market often, they can be caught off guard by a bear trap and lose out on a lot of money.
Another thing about being lucky is that there is less chance that the price will go against you.
• It can reduce the chances of losing money
This strategy reduces losing money because traders can sell off quickly and then buy back in at a lower price.
It may not sound like a good strategy, and it is not unless you are confident in your trades and have a good eye for predicting what will happen in the markets.
• It can be low risk
There is a meager chance of losing whatever you have invested in a bear trap because the market will not go against you as much as it would in other types of trades.
To put it simply, if you are following an idea, then there is no risk involved with that idea.
Cons
• Very high chance of losing money
This type of trade can be very profitable if profited on quickly enough.
However, even though this trade is good, the potential for a loss exists.
There are no set rules on what can and cannot happen in the market, and traders need to know how to avoid bear traps because they can quickly lose out on a lot of money.
• It cannot be an accurate source of information
This type of trade cannot be used to find out what is happening in the markets because they are unpredictable.
Conclusion
Bear traps are very unpredictable trades that can potentially make you a lot of money or, in some cases, cost you a lot of money.
They are not recommended for most traders because there is no way to predict when or if it will happen again accurately.
Some successful traders will use bear trap trades to their advantage and make big money off them, but these traders are few and far between.
It is always best to know how the market works and how to avoid bear trap trades before they affect you.