Bear Trap In Trading And How To Avoid It?

The cryptocurrency market is always full of risks and pitfalls, not only the Bull Trap bull trap, traders also have to face the Bear Trap bearish trap. So do you know, what is Bear Trap? How to recognize and prevent bearrap traps?

What is Bear Trap?

Bear Trap is a false signal that appears in an uptrend, signaling that the price will reverse to the downside. Usually when a Bear trap occurs, the price begins to break the support level, making investors think that the price will reverse to decrease, so they quickly enter a Sell order. But the price only dropped a little and then quickly turned back up in the initial uptrend, causing the trader entering the trade to suffer significant losses.

Bear traps, also known as false breakouts, are common in financial markets such as stocks, forex, and cryptocurrencies.

When does Beartrap usually appear?

To avoid Bear trap, you must first understand when Bear traps usually appear and why.

“Whale, Shark” Appears

“Whales, sharks” are investors with very large capital and they have the ability to manipulate the market. To create a Bear trap, they continuously sell with large volume to pull the price down, and at the same time release negative news to make investors believe that the market will go down in the future.

At this time, inexperienced investors will “catch the trap” and sell. At this time, the shark will have the opportunity to buy in to redeem. The buying volume was too large causing the price to turn up. At the same time, other traders who saw the price rise also started to join the market and push the price higher.

Many investors take profits, causing a correction effect

When an uptrend has been maintained for a long time, many traders feel that their profits are enough and want to take profits. When many orders are closed at the same time, the price will stop rising and adjust down. At this time, many traders believe that the uptrend has weakened and is about to turn back, so they enter a Sell order massively, causing the price to drop deeply.

After a temporary decrease, Buy limit orders will be activated, the price will start to rise again and a Bear trap has formed.

Unexpected news

When political and economic news that is unfavorable for cryptocurrencies comes out, it will cause prices to drop temporarily. But after a time of news disturbance, the price will continue to rise again following the old trend.

Lack of liquidity

The fact that traders create buy orders continuously in the trend will make the Order Book lack of liquidity because there are few sell orders to match. The market will have stronger corrections than usual. At this time, some traders keep their Stop Loss close to being activated. That will create liquidity for the market. After the market has enough liquidity, the price will continue to increase and a bear trap is formed.

How to recognize Bear trap

To avoid Bear trap in addition to knowing the times when this type of trap appears, traders also need to know the Bear trap signs that we list below.

Check trading volume after the breakout

Besides observing the chart pattern after the breakout, traders also need to pay attention to the trading volume. Usually if it is a real breakout then the volume will also increase steadily. But if after the break, the mass does not increase sharply or increases erratically, it indicates that there is a shark footprint. Most likely this is a Bear trap.

The RSI is in the oversold zone

The RSI indicator gives traders a comprehensive view of price changes. Accordingly, if the price breaks through the downward support zone but the RSI is still in the oversold zone (RSI<30), it shows that the price will reverse to the upside. The break through support is false (Bear trap).

Important Fibonacci levels

Using the Fibonacci tool also helps traders to identify Bear traps quite well. Specifically, in an uptrend, if the price breaks the downward support level but reuses it at important Fibonacci ratios such as 23.5%, 38.2%, etc., it is highly likely to be a bearish trap.

How to avoid bear trap effectively

Usually, professional traders are less likely to fall into the Bear trap than novice traders. Because mistakes have been experienced and trained over the years. Below, are some experiences on how to effectively avoid bear traps that you can refer to.

Building a knowledge base

Traders need to understand the coin/token they are holding or trading. Besides, you also need to build a foundation of knowledge about the market, price action, technical analysis, and crowd psychology to accurately identify the market before entering an order.

Moreover, knowledge also needs time to experience, draw and evaluate through reality. For inexperienced traders, learning through information channels, mistakes of old traders and practicing backtests will help make the knowledge base more sustainable.

Control your own mind

Traders often lose money when they enter random orders and are blinded by greed. Therefore, to avoid making mistakes, traders need to build a set of rules for themselves to remove emotions in trading.

You should limit the number of coins/tokens that are suitable for your assets. Avoid investing too many coins/tokens leading to inefficiencies.

Traders need to track actions to know the characteristics and habits of crowd psychology. Besides, it is necessary to spend time doing specific analysis with clear analysis tools and order planning.

Keeping a diary of daily price movements also helps traders keep abreast of the market to avoid arbitrary analysis.

Rules for entry and stop loss

Traders only enter orders when the price goes according to the planned scenario. Avoid following the market continuously, entering unplanned orders and being dominated by greed and fear of missing opportunities. Fixed trading volume and loss amount for each trade from 2%-5% of the account.

Do not use too high leverage

Depending on the ability and experience of trading, traders will choose the appropriate leverage. The lack of experience and use of leverage in trading when caught in the Bear trap will lead to heavier losses.

Conclusion

Whether you are a new or old trader, there is a possibility of falling into the Bear trap. Therefore, traders need to identify the times when bearish traps often appear and know how to recognize Bear traps. Hopefully, through this article, you have understood what a Bear trap is and gained more experience in avoiding Beartrap traps effectively.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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