Bear Trap in Forex Trading
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A bear trap in forex trading is a powerful strategy used in a bear market. In this strategy, a trader places a buy order near the bottom of the market and a sell order near the top of a price range.
The main goal of this strategy is to catch the traders who are trying to sell or buy at that price. So, the bear trap occurs in an aggressive way to trade because the price will sometimes go back to before.
Most traders will use this strategy just in the hope of making a massive profit in a short period. Later on, they quit just because they were ahead now.
For beginner traders, using bear traps is not a good option in a bear market. This requires excellent timing and a proper understanding of Forex and the stock market, supply, and demand, contrary to many demands and market movements.
Have you ever experienced a bear trap’s devastating market force? A trend reversal begins when the all but certain bullish trend abruptly ends. Once you see that drop, you say, Hey, let’s short-sell the equity.
You’re trading, and the price breaks contrary to your predictions! That’s terrible! Have you ever felt that way? Traders call this situation “Bear Traps”.
This article aims to explain how bear traps happen and avoid falling victim to them.
What is a bear trap?
A bear trap, in marketing terms, is a strategy used by institutions to take advantage of newbies who do not identify when they are being played. Making a false signal means the asset’s value is starting to decrease.
Unsuspecting traders, considered bears, are trying to sell them as quickly as possible to lose money, thinking they can repurchase them at a lower price.
This movement creates a high demand for currency pairs (or other assets). And, as traders believe, the price will not go down but rise and rise further due to the sudden demand created.
If you want to protect your capital, you should avoid bear traps. In some cases, the desire to recover money can lead to the complete loss of the deposit due to the frequent appearance of bull and bear traps in the charts.
No one is immune from falling into bear traps in the market since it means a change in price movement.
The bear trap chart pattern is named so because it lures traders into short positions that quickly reverse.
A bear trap can sometimes be identified and avoided if you know what to look for.
Here are some tools that help us avoid bear traps:
- Volume Indicator – low volumes represent move uncertainty.
- Fibonacci Levels – price tends to bounce from crucial Fibonacci levels.
- Divergence Tools (like Oscillators) – Bullish trend divergences imply an upward price move.
- Price Action – patterns could often contradict bearish breakouts.
This could be a bear trap if some of these four signs are present during bearish breakouts.
By spotting bear traps, we can avoid them. It is easy to hedge bear traps by putting stop-loss orders on your trades.
A bull trap is the opposite of to bear trap. The bull and bear traps only differ in direction
Similar to bear traps, bull trap operates in the opposite direction.
When are bear traps a lot more familiar?
Bear traps in trading are common when any currency pair starts to have a sudden increase in demand after a breakout in its value. This same thing happens when looking at intraday charts, so it is very important to be careful.
But this phenomenon is common in today’s forex market, where it works great in almost all asset classes. Similar manipulations occur in all time frames and all markets.
Moreover, the same thing is happening in the opposite direction, known as the bull trap.
How does it work?
It works as the traders who bet against assets (short-sellers) cover their debts as the value of the asset gains instead of the losses. This usually means keeping a fixed amount of equity in your account compared to your margin.
One way bear traders can bet against the currency pair is to sell short, which involves borrowing the asset to sell and hoping to repurchase it at a lower price later. A short deal means you borrow shares from your broker and lend them back.
The amount you owe your broker equals the amount of currency multiplied by the current market price. If the price breaks, so do your debt. As it gains value, your debt will grow.
An outage occurs when the price rises to the point where you can no longer meet your broker’s equity compared to the amount of asset you are lagging.
It would help if you closed a short position immediately (to lock in losses) or saved more money. If prices continue to rise, you should continue to save money or accept further losses.
An asset can fall into bear traps in the financial markets if it breaks down a key support level for some time before reversing, thus restoring the position lost. There can be a sharp breakout of a support level and a reversal.
Bear traps occur frequently. This is due to the bulls dominating the force balance. The market is in this situation when there is more demand for the financial instrument than supply. Buyers who want to attract more sellers overprice to attract more buyers.
It’s here that interesting things happen. Inexperienced traders who enter short positions at the support level and set stop losses too high are likely to lose trade after false breakouts. Large players, banks, and market makers collect liquidity, which provides momentum for an upward trend to develop.
Setup of bear traps
The pattern of the bear trap Forex is an elementary setting. You want the new range split at the bottom with the best high volume. The asset price should return to the top of the support level within five candlesticks and then explode from the top of the range.
The final part of the setup is that the asset needs to be in a decent price range. A wide price range is significant because it increases the chances that a pair has a trending point for making a quick profit.
Why does a bear trap make sharp rallies?
When the last swing maximum is broken, there is the first wave of buying because many short-term traders have their stop just above the previous swing maximum.
The second wave of shopping comes when strong trainers realize that it is not just a dead cat but that the movement has legs. This leads to a second jump, usually preceded by a short sell at the end of counter-movement.
What are the two leading causes of the bear trap?
The bear trap strategy does not occur in all financial markets. There are two major causes of its happening, which are:
1. Lack of liquidity
A bear trap can generally happen when insufficient supply or demand lets the price fluctuate between the buy and sell orders.
But this problem can be fixed quickly by making the financial markets more liquid and making more trades. An increase in volume will change the price rapidly for an improved payoff on both sides of the trade.
2. Price is not correcting the movement of the price.
This is another major cause of the bear trap, in which a price will hit a low for a certain period. But it will never rebound immediately.
It will prevent the experienced traders from making an extra profit because they start selling a bit higher than expected.
So, different institutional traders will use different strategies to avoid it and keep the trend going in the same direction.
How can you identify a bear trap?
A bear trap can, at some point, cause considerable losses to many traders. To avoid this kind of business risk as much as possible, you need to understand this strategy before using it. Other technical details to pay attention to are:
Divergence is used to know if the indicator and price are moving in the same direction. If there is no difference, it means there is no bear trap.
2. Market volume
Market volume is a critical indicator of bear traps. There has been a significant change in the market’s overall volume as soon as the price rises or falls.
But if there is no such significant increase in volume once the price starts to fall, then it is a trap.
Short volumes often represent a bear’s fall because bears do not always pull the price down.
3. Fibonacci level
The Fibonacci levels help to identify the changes in market prices. Thus, the trend changes are generally identified by using Fibo-ratios. A breakthrough will likely happen if a trend or price doesn’t break through a Fibonacci level.
What are the different ways to avoid the bear trap?
There are several strategies to avoid being caught in a bear trap. Some traders suggest some unique ways, which are discussed below:
Use different strategies.
You can also avoid this strategy by adopting other best trading strategies. One best example is the use of zone trading. This type of trading occurs when a trader enters a purchase order and sells it in a different market.
If this investor does not want to place a sell order, he will sit in the deal and wait until the price rises again in anticipation of profit.
Setting the price
Another way to avoid the bear trap is by setting the price. If you consider buying a coin at a specific price, you must wait until that price rises to a significant amount or never trade to make sure you lose money.
Trade on a different day or time.
A variety of strategies are available with which a trader can prevent itself from getting into a bear trap.
Many of us are fond of investing during the morning time. If you are one of those, changing your time to trade is better. This will probably allow the price to start moving in a completely different direction suddenly.
Checking the volume
If you consider purchasing, you might see that the price is not moving in either direction. In that situation, you should figure out why no volume is moving in any direction.
Widen the Stop Losses
Many traders take support and resistance levels literally and see them as nothing more than lines. Say the S&P 500 is trading at 3,050 points and has formed a support level at 3,000 that has held declines in the past. When the price breaks below that support level, some traders jump into selling, which often kills your trade.
That’s wrong since it implies considering support as a line across many ranges. That doesn’t make any sense. Rather than just a line in the sand, support and resistance levels should be viewed as buffer zones. Avoid placing your stop losses below the line. Since this is not a fixed geometry game but rather a fluid game of cash flow, each trade needs some breathing room.
Wait for Confirmation
As we explained above, a bearish trap happens when candlesticks close above support or moving average. When trade breakouts occur, other traders who sell immediately set themselves up to be slaughtered by those who do not wait for the candlestick to close. Others wait until the bearish candlestick closes, and some bear trap candlesticks close below the support. Trading enthusiasts see the candlestick’s close as a confirmation. It is often necessary to wait for another bearish trend to confirm that the support zone has been broken. That would be a clear indication that the support level has been breached.
1. Highly profitable
This strategy is advantageous if you are using it with alternative trading strategies. But besides using a bear trap, you need to watch the market conditions; otherwise, you will lose a lot of money.
2. It helps to reduce the chances of losing money
The significant benefit of this strategy is that it helps to reduce the loss of money. This is because forex traders can sell off very quickly, and later on, they repurchase it at a low price. Avoid using this strategy if you are unsure about your trades and cannot predict market movements.
3. It may be low risk
There is little chance you will lose what you have invested in grief because the market will not move with you like other types of trading. Following the right idea will always help you avoid any risks involved.
1. A very high probability of losing money
This type of trading can be profitable because it is easy to profit.
While this trade is good, there is the potential for loss. There are no hard and fast rules to determine how the market reacts under different conditions. Understanding the bear trap is always a better option because it can suddenly make you lose a lot of money.
2. It is unpredictable
You can not use this trade to understand what is happening inside the market. This is because it always brings unpredictable results.
Is it worth using a bear trap?
The bear trap pattern requires the dealer to be ready for change. Sometimes the price moves in the focus direction, while sometimes, you can see the classic pattern of bear traps.
The bear trap pattern can therefore be integrated into your current strategy. They can alert you to potential price action changes.
A big profit can be made if the trader is patient enough to wait for this formula to work out. In general, however, such steps in positions are not uncommon.
You can find these business charts in different time frames and assets thanks to chart patterns, candle patterns, technical indicators, and variability.
Note that the pattern can be created in several sessions or over a wider area. Because pricing is usually solid and fast, traders should also focus on developing a good risk management strategy.
However, trading in bear traps is a great way to make immediate profits instead of opening trades in the long run.
1. What is the meaning of the bear trap?
In trading, the bear trap is about the temporary breakout of the support level, after which recovery and the recovery of lost positions will follow.
2. How can you identify a bear trap?
To identify a bear trap, you first need to choose a timeframe. A larger time frame will display accurate signals. Identify the support and resistance levels. Later on, you can perform a comprehensive technical analysis.
3. Is a bear trap bad or good?
A bear trap can be a good opportunity for traders if they potentially know how to use it correctly. By using the best strategies, you can make a considerable profit.
4. Is the forex market in a bear trap?
By analyzing the MACD oscillator, you can easily understand if the market is in a bear trap. In this way, you can also determine the entry point into the market through the intersection of moving averages.
To sum up the discussion, bear traps are probably the most unpredictable trades you can ever experience in trading. Sometimes, it can either make a lot of money or cost you a lot.
It is not a highly recommended trade because there is no way in which a trader can predict when and how it will happen accurately.
Some bearish traders have successfully used the bear trap trades to make big money. Being a newbie, knowing how the bear trap works in a market and how you should avoid this trade before it affects you is essential. Before making any trading decisions, you should seek independent financial advice and familiarize yourself with the risks. Then, start trading CFDs or Forex while considering bull and bear traps.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst