The major distinction between the traditional finance market and the decentralized finance market is the level of unpredictability of the outcomes. Crypto investors usually take note of the dominant market trends and make calculated investments. However, there are times when such forecasts and predictions take a reverse turn without prior notice. A bear trap is such a situation.
In this article, you will read about the crypto bear trap, how it works, the types of crypto bear traps, and ways to avoid them.
What Is A Crypto Bear Trap?
The crypto bear trap refers to the sudden reversal of the seemingly bearish market of a particular crypto coin to bullish sentiments. This situation will cause immense losses to the traders who have sold their assets due to the anticipated bearish trends.
When a coin’s price starts falling, large investors start selling their holdings. This creates some sort of panic among the smaller investors who also start selling their assets. They are forced to sell the coins at a very low price. Here is the trap.
When the price starts to rise slowly, large investors buy the tokens back; small investors are not in a position to buy the coins back at a cost price higher than their selling price. They are ensnared and lose significant amounts in the process.
Bear traps trick those investors who are not fully aware of the momentum of the market and act prematurely to the market trends without proper study or analysis.
Bear traps are rampant in the following conditions:
- Bear traps are possible at times of high price volatility.
- It is possible to happen when a particular cryptocurrency is oversold.
- It can occur at times of low liquidity for a coin in the market.
- Any sudden developments or positive changes in the market trends can cause a price rise, resulting in a bear trap.
These traps are warning signs to make investors aware of the need to combine risk management and mitigation activities and should strategize ways to exit the market at times of such trap situations.
What Are The Different Types Of Bear Traps?
The manipulation efforts that lead to a bear trap come in different forms. Here are the types of bear traps.
- Spoofing: In spoofing, large traders deliberately act towards changing liquidity to attract price towards a low point, then reverse the liquidity trends once they’ve achieved their goal.
- Collusion: In collusion, traders work together to bring down the price of a cryptocurrency initially and then act together towards a price rise. Large investors act together to trick the smaller investors into selling their assets at low prices.
- Selling pressure: Bear traps are related to higher selling pressure than demand for a particular token.
How To Identify Bear Traps And Avoid Them?
Now that you are aware of the causes and types of crypto bear traps, here are the ways to identify and avoid them. If the price of a crypto asset falls below a safe level and climbs back suddenly at short notice, you should suspect a bear trap.
You can identify a bear trap if there is a price decline unsupported by an increasing trading volume. In such a case, you can be convinced that there is suspicion among the investors.
About A Possible Bear Trap
Moreover, you can analyze bearish trends with a close watch on the technical analysis indicators such as the relative strength index and the stochastic oscillators. If the candlestick pattern of the fall in the price is in the form of a hammer or a bullish engulfing pattern, you can expect a sudden price rise.
If you are a crypto investor, you should take care not to enter short positions solely based on price movements. You should thoroughly analyze the trading volume and technical analysis indicators too. You should also make your entrance into the trading market well in advance to be able to predict a volatility risk.
Methods To Avoid The Bear Traps
- Trend Confirmation: You should avoid swift decision-making and confirm the market trends by analyzing the volume, moving averages, and candlestick patterns.
- Use of additional technical analysis indicators: You should analyze the patterns shown by additional technical analysis indicators such as Fibonacci retracement levels, the RSI, and the moving average convergence divergence to identify sudden reversals of the price.
- Sentiment Analysis: Always keep a strict follow-up of the market sentiments through news and other market analysis tools. If there is an indication of a sudden rise in the price of an asset after continuous decline, you should suspect a bear trap.
The Bottom Line
Bear traps are undesired outcomes of crypto trading. However, a thorough and steady analysis of the market and the calculated moves can help you identify bear traps on time and avoid falling prey to them.
