A BEAR TRAP is a deceptive move in the financial markets where the price of an asset suddenly drops, leading traders to believe that a significant downtrend is beginning. It appears that the bears are taking control, but this move is often misleading!
Instead of continuing to fall, the asset quickly reverses direction and begins to rise, catching traders off guard. Those who quickly sold or shorted the asset are left in a bind, having to buy it back at higher prices as the market recovers, often resulting in unexpected losses.
There are several main scenarios where bear traps can occur:
False Breakouts:
The price briefly drops below an important support level, but soon recovers, leaving traders confused and trapped.
Market Tactics:
Influential traders or institutions may deliberately drive the price down to create panic, allowing them to buy the asset at lower prices before pushing it up.
