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What Are Cryptocurrency Bear Traps and Bull Traps? How Do I Avoid Them?

In a bid to get into market trends early, many traders get caught in traps and lose significant amounts of money. Unfortunately, these traps occur very often when trading cryptocurrencies. Understanding how these traps work and how to avoid them can be the key you need to enter into the right reversals.

In this article, we will explain how bear and bull traps work and how to avoid them.

What Is a Bear Trap?

A bear trap is a technical pattern noticed when the price of a crypto asset shows a false reversal of an upward trend to a downward trend. In simple terms, they are fake price drops that a few traders often trigger to mislead inexperienced traders into taking a short (sell) position.

This phenomenon is called a “bear trap” because it traps inexperienced traders trying to benefit from the fake bearish (downward) move.

What Is a Bull Trap?

A bull trap is the opposite of a bear trap. It occurs when a selling market suddenly shows a bullish move, resulting in a rising market price, which is usually short-lived. The rise in price lures many buyers into the market, but before they can make a significant profit, the price reverses and continues as a downtrend.

Bull and bear traps are false reversal signals that can make you lose a lot of money if not handled well.

How Bear and Bull Traps Work

These traps are crypto market manipulations carried out by traders holding large quantities of a cryptocurrency.

The collective selling (in the case of a bear trap) or buying (in the case of a bull trap) of a particular token affects the price, temporarily causing it to move in an opposite direction. During this short move, some investors who believe the market is already changing direction will be forced to respond to the market’s move and thus get trapped.

An Example of a Bear Trap

Having described what a bear market looks like, let’s quickly look at a practical example to better understand how it works.

From the chart above, the price was pushed below the trend line (the support) during the bullish trend to make it look like the support would be broken. Within the same candlestick, the price went back up to continue the bullish trend.

Impatient traders would have jumped into the trade as soon as it broke the trend line, and thus, they would have gotten trapped. On the other hand, traders who waited for the candlestick to close outside the trend line and make a retest would not have gotten the opportunity to execute a trade, thereby being saved from getting bear-trapped.

A Bull Trap Has a Similar Pattern in the Opposite Direction

A bull trap is often characterized by an initial downtrend, i.e., a decline in price, followed by a false rebound, which is usually weak. The rebound is then followed by a continued fall in price that forms a new low. Traders that fall into these traps typically buy too early.

4 Ways To Avoid Bull and Bear Traps

Now that you have understood how these traps work, let us consider some practical ways in which you can avoid them or at least manage them.

1. Check the Trade Volume

Checking the trade volume of the affected asset can help you identify and avoid bull and bear traps. For example, when there is a reversal, there should be a notable increase in volume because many traders and trade orders are usually involved in the process. However, if you notice a reversal without a noticeable increase in volume, it could be that the price change would not last, and it is only a trap.

You can also look for candlestick volume higher than the average volume. A breakout that is of low volume and also shows an indecisive candlestick could be a false breakout.

2. Look for Confirmation

If you are one of those who jump into trades at any and every market move, you will lose your money.

Patience is one of the qualities of a good trader. Therefore, when a breakout occurs, traders usually wait for confirmatory signals by looking at different technical indicators to see if bearish or bullish momentum is truly building up. Indicators you can use to confirm this include the Relative Strength Index, Average True Range, Bollinger Bands, and Moving Averages, among others.

The market will not always react the way you anticipate. However, using different technical tools to confirm trade entries will help you minimize losses.

3. Wait for a Retest

When a sudden bullish move breaks a resistance, it is better to wait for a retest and allow it to gain a bit of upper momentum before executing buy orders. Likewise, allow a sudden selling move to break the support, retest the resistance, and continue the bearish movement before entering a trade.

Many traders see the breakout and retest method as a reliable trading method. However, you must understand how support and resistance work to use this method effectively.

4. Always Use Stop-Loss Orders

A stop-loss order automatically closes a losing trade when the price reaches a predefined point. It is designed to limit your loss when an unfavorable market event happens.

Using a stop loss will help you limit your loss if you fall into bull or bear traps. To get the most out of stop loss orders, you need to get accustomed to using them every time you trade. A stop loss will always keep your losses in check, so you do not lose more than you can afford to.

The Measures Don’t Work in Isolation

To effectively avoid the negative impact that bear and bull traps can have on your trading balance, we recommend that you use a combination of the methods described above. None of them can work effectively in isolation.

There have been cases of low trade volume at the beginning of a reversal that ended up being a real reversal. Also, some false breakouts might last for a long time (depending on the timeframe you are trading in), making you think it is a real reversal.

In all, always use a stop loss as it will help you predetermine the extent of your loss (when one happens) and keep you in control of your trading balance.

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