When the price of a stock drops and is close to a support line, it is a bear trap. The price must be at least five candlesticks above this support level and trending above the resistance level.
what is a bear trap?
There are several indicators to identify a bear trap, but the most crucial is the price range. The wider the price range, the greater the trading opportunity. If you're unsure about the range of a stock, you should always check it before trading.
How to Avoid Bear Traps in Investing and Finance
In order to avoid falling prices, you should trade the opposite direction of the trend. A bear trap occurs when the price rises sharply when it should be declining. This type of trading is very dangerous because it can lead to a loss for short sellers.
But if you can trade a bear trap correctly, you'll find a way to profit from this type of market situation. Listed below are some of the most common bear traps and some strategies for avoiding them.
Bear market trends
Bear traps happen when the market is on a bull trend, but it's a different story if the price is falling. In such cases, an asset that has been losing value suddenly reverses course and starts to gain value.
Traders get caught up in this situation because they have short stops and small holding times. The sharp reversal of the bull trend may be caused by profit booking by institutional investors or by a new fund entering the market.