Broker Review Contents
Description of bear trap
A bear trap is a kind of synchronized but regulated selling used to induce a brief decline in the price of an asset as a precursor to a short-squeeze. When investing in marketplaces that handle with types of investments like stocks, commodity, securities, or even cryptocurrency. New traders are often caught off guard by price volatility.
Price reversals may baffle even the most seasoned traders. Despite the fact that it is advised to remain engaged for the lengthy period necessary to weather such periods of volatility. It is crucial to spot indications of a false reversal, or a temporary shift in price direction, before continuing the underlying trend.
How do bear traps operate in cryptocurrency markets?
A bear trap in the cryptocurrency markets attracts both pessimistic and bullish bets, frequently with disproportionate risks attached. This process is similar to that found with other asset classes.
A bear trap in the crypto markets is a type of market deception that is decided. Because of effective coordination of a collective of market participants who hold enormous amounts of the underpinning cryptocurrency. It is used to characterise both the method and the brief price reversal falsely signalling the beginning of a downtrend. A specific token’s price drops as a result of everyone working together to sell it off, leading one to think the upswing has ended.
Investors with short-term securities would then hastily purchase the cryptocurrency in an effort to reduce losses. Therefore, the trading group, or bear trap setters seek to benefit from the difference by selling at a premium cost and purchasing back all liquidated positions at a relatively cheaper price without having an impact on the overall amount of cryptocurrencies they hold over time.
Short-selling vs bear traps
The first step in setting up a bear trap is to short sell a cryptocurrency or establish short positions using other trading instruments. Prominent cryptocurrency like Bitcoin (BTC) may be shorted using a variety of strategies. As a result, shorting a cryptocurrency or doing so through other methods is a frequent activity. However, cutting a cryptocurrency on an excessively big scale might lead to a general increase in the fear quotient. Which will put tremendous downward pressure on its pricing.
Bear trap is bullish or bearish?
A bear trap may be exploited by bearish and bullish investors utilizing significantly different tactics and possible results since it includes both a downward and an upward swing. A bear trap is a situation in which the underlying asset experiences a shift in momentum. That is the opposite of the main bullish trend before quickly reversing back to continue its upward movement.
How can a bear trap be recognized and avoided?
The use of charting tools found on most brokerage firms may help traders identify bear traps, which are challenging for newcomers and need care. Since they may help determine if the trend reversal after a stretch of steadily rising prices is real or just an attempt to entice shorts.
To eliminate the possibility of a bear trap being set up, every decline must be supported by large trade volumes. Generally speaking, the retracement of prices just below a significant support level. The inability to close below crucial Fibonacci levels, and low volumes are indications that a bear trap is developing. It is advised to avoid investing during sudden and unjustified price reversals.