What is Bear Trap?
Bear trap is a technical pattern and occurs when the performance of a stock, index or other financial assets mistakenly signals a reversal of an uptrend.
In this way, this trap can hide the rising price trend from the eyes of investors. Bear traps make Investors to open short positions with the aim of making a profit based on predictions made about future price changes that, of course, never happened. The opposite of this phenomenon is called Bull Trap.
A bear trap can cause market participants to expect the price of a financial asset to fall and, as a result, sell the asset or open a short position. However, the value of the asset in such a scenario remains unchanged or increases, which ultimately causes the trader to lose.
In such a situation, a bullish trader may sell this declining asset and a bearish trader is likely to try to take advantage of the price reduction by taking the short positions; But the downtrend does not continue or reverses after a short period of time. This price return is known as bear trap.
Market participants often analyze market trends based on technical models and then evaluate investment strategies. Technical traders try to use various analytical tools such as Fibonacci displacements, relative strength index (RSI) and volumetric indicators, identify and avoid bear traps. These tools help traders to understand and predict the accuracy and stability of the current price trend of an asset.
The bear is actually an investor or trader in the financial markets who believes that the price of an asset will fall soon.
Bears may also see the general direction of a financial market decline.
A bear financial strategy seeks to profit from the declining trend in the price of an asset. The short position technique is usually used to implement these strategies.