Bear Trap is a technical analysis concept that refers to a signal that a bullish trend is reversing. The Bear Trap makes one believe that a Bull Market is turning into a Bear Market, a prediction that will later prove to be inaccurate causing losses to those who set bearish trades following such a signal.
What does the Bear Trap consist of?
The Bear Trap is a particular technical pattern that occurs when the price of a particular financial security undergoes a false reversal. According to technical analysts, institutional traders try to create several Bear Traps to deceive retail investors and make money at their expense.
When retail investors decide to position themselves with bullish positions, the stock price rises. At that point, institutional investors may decide to sell their shares going into profit and causing the price of the financial stock to plummet.
The Bear Investor
Related to the Bear Trap concept, there is also that of the Bear investor. A Bear investor is a particular type of trader who believes that the price of the securities he or she invests in will decline over time.
In order to make money from the financial markets, the Bear investor is in the business of opening short sale positions, through instruments such as CFDs. In this way, the moment the price of the financial security falls, the Bear investor will go into profit and can close his trading position.
A short seller risks maximizing a loss or triggering a margin call when the value of an index or stock continues to rise. An investor can minimize the damage of traps by placing stop losses when executing market orders.
Key points
- The Bear Trap is a particular price dynamic in which there is a false bullish bias
- Institutional traders are familiar with and use the Bear Trap to turn a profit
- The Bear Trap usually produces losses in retail investors
- There is a particular category of investors who are in the business of opening short positions to gain from the depreciation of financial stocks