Understanding Bear Traps
A bear trap refers to a situation in which a group of traders, collectively holding a significant amount of a cryptocurrency, coordinate to sell a large quantity of that coin simultaneously.
The purpose behind this coordinated selling is to create the perception of a price correction, leading other market participants to sell their holdings in response.
This selling pressure drives prices further down.
Once the bear trap is set, the traders “release” it by buying back their assets at a lower price.
As a result, the value of the coin rebounds, and the trap setters profit from the price increase.
While bear traps initially originated in the stock market, the term is now used to describe both the technique itself and a specific technical indication of a reversal in a market downtrend within the context of cryptocurrencies.
Bear trap trading pattern.
Spotting Reversals and Capitalizing on Price Increases
Bear traps can occur over several days or within a matter of hours.
They typically begin when the demand for stocks exceeds the number of willing sellers.
The buyers increase their bids, attracting more sellers and driving the market upwards.
Since stockholders realize profits only when they sell their shares, higher acquisition rates create additional pressure to sell.
In response, institutional investors dump stocks, hoping that less-experienced market participants will follow suit and sell their shares, further pushing prices down.
Once prices have fallen to the desired level for the institutions, they buy back large amounts of stock, leading to a price increase and allowing them to make a profit.