What is a bear trap in trading and how to avoid it?

As a troublesome proposition for novice merchants, a bear trap could be acknowledged by utilizing charting instruments obtainable on most trading platforms and calls for warning to be exercised.

In most instances, figuring out a bear trap requires the usage of trading indicators and technical evaluation instruments similar to RSI, Fibonacci ranges, and quantity indicators, and they’re possible to verify whether or not the pattern reversal after a interval of constant upward worth motion is real or merely meant to invite shorts. 

Any downtrend should be pushed by excessive trading volumes to rule out the probabilities of a bear trap being arrange. Generally talking, a combination of factors, together with the retracement of worth slightly below a key help degree, failure to shut under important Fibonacci ranges and low volumes, are indicators of a bear trap being shaped.

For crypto traders with a low-risk urge for food, it is finest to avoid trading throughout abrupt and unsubstantiated worth reversals until worth and quantity motion confirms a pattern reversal under an necessary help degree. 

It is sensible to retain cryptocurrency holdings throughout such instances and avoid promoting until costs have breached the preliminary buy worth or stop-loss degree. It is helpful to perceive how cryptocurrencies and the entire crypto market react to information, sentiments and even crowd psychology. 

Practicing this may be far more troublesome than it appears, particularly when one components in the excessive volatility related to most cryptocurrencies in commerce right this moment.

On the opposite hand, if you happen to do need to revenue from the momentum reversal, it is higher to get into a put choice fairly than short-selling or changing into a lengthy vendor in the underlying cryptocurrency. This is as a result of short-selling or promoting a name can expose the dealer to limitless threat if the cryptocurrency resumes its upward pattern, which isn’t the case if one opts for a put place. 

In the latter technique, losses are restricted to the premium paid and haven’t any bearing on any lengthy crypto place being held from earlier than. For long-term traders searching for revenue with out excessive dangers, it is higher to steer clear of trading throughout a bear trap altogether.