What is a Bear Trap in Crypto? How does it work? – Beginners Guide

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Home >> Education >> What is Crypto’s Bear Trap and How Does It Work? Key takeaways from the Beginners Guide:
A bear trap is a false technical indicator of a market reversal, from an uptrending to a downtrending market.

Bear traps can be found in all asset markets, including currencies and cryptocurrency.
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Bear traps are a form of market correction that can be caused by a bullish move higher.

It’s not an easy task for novice traders to spot a bear trap, but charting tools can help.

IntroductionA bear trap is a technical pattern in which the price action of a stock, or any other financial instrument, incorrectly signals a change from an uptrend towards a downtrend. The prices may rise in a broad-based incline. The price may then face significant fundamental resistance or change, which prompts bears to open short trades. Trending StoriesIn cryptocurrency markets, a bear trap is usually a group of traders who have large combined cryptocurrency holdings. They might plan to sell large amounts of a specific coin simultaneously. This creates a false impression that other market participants believe that a price correction has occurred. In response, they sell their own holdings, which further drives down prices. The bear trap is broken and the group buys back its assets at a lower cost. This causes the coin’s value to rebound, which allows the trappers to make a profit. How does a Bear Trap function in the Crypto Market Traders new to cryptocurrency trading are often caught unawares by the volatility in price. Although it is best to stay for the long-term to avoid such volatility, price reverses can confuse even the most skilled traders. It is crucial that traders recognize the signs of a false reverse. An increase in volatility can tempt short-term traders into trying to time the markets. This can lead to losses for the majority. Markets that trend upwards can experience sudden price drops, which can cause volatility to increase, leading market participants to either short the underlying asset or liquidate their long-term holdings. This type of market manipulation is known as a bear trap in crypto. This move is designed to trick bearish participants into believing it is a sign of a downtrend. This is often followed by a sharp rebound of the previous uptrend. How can traders profit from a crypto bear trap by working together? Groups of traders work together to sell a specific token. This causes the token’s value to fall, which makes other retail participants believe that the uptrend has ended. Investors then tend to sell their holdings, which further decreases the price. When the tokens are below their previous lows, the influential traders groups will buy back the tokens. This causes a sharp upward movement that traps bearish bets. The trader group makes a profit by selling the items at a higher price and then buying them back at the lower price. How can traders avoid falling into a bear trap? Traders can use technical analysis tools, such as Fibonacci levels, volume indicators, and RSI, to identify a beartrap. These tools can be used to confirm if a trend reversal occurs after a consistent upward price movement.

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Trader must ensure that the downtrend is not being driven by high volumes to make sure there isn’t a bear trap. A combination of factors can indicate a bear trap is forming, such as a retracement below a key support level and low volumes. Failure to close below critical Fibonacci levels are also indicators. Investors in crypto should not trade during price reversals that are sudden and unsubstantiated. They should verify that the price and volume action confirm a trend reversal below an important support level. It is a good idea for traders to keep their cryptos, and not sell if the price breaches the stop-loss level. If traders want to avoid falling into a bear trap, they must be able to understand how crypto reacts to news, sentiments, and crowd psychology. Due to the volatility of the crypto market, this is not an easy task. Traders who are looking to make a profit can opt for a put option, which allows them to avoid being a short-seller and long-seller. If the trend continues upward, a put option will protect you from unlimited risk. This is not the case for short-selling. AdvertisementA trader can limit his/her losses by purchasing a put option. It stops it from affecting the long-term crypto position that was held from before. Long-term investors should avoid trading in bear traps. FAQCan bearish or bullish traders trade a bear trap? A bear trap can be traded by bullish or bearish traders. It has both a downward or upward movement. What is the difference between a bull trap and a bear trap? A bull trap is the opposite to a bear trap. This is when traders believe that a downward trend will reverse and begin to take long positions. However, they later realize that the market has reverted to its downward trend. Can traders escape from a bear trap. A bear trap can cause serious damage to a trader’s PnL. These traps are quick and have no chance of recovery. To preserve their PnL, traders need to understand the underlying market movements during bear traps in order to identify it. About the author
Disclaimer
The content presented may contain the author’s personal opinion and may not reflect current market conditions. Before investing in cryptocurrency, do your market research. Recent blogs

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