How Does Bear Trap Trading Work?

  • January 17, 2019

Do you know what bear trap trading is? It's important to study bear trap stocks if you don't want to lose money (assuming this is everyone reading along).

What Is a Bear Trap When Trading?

  • The basic definition of a bear trap trading is when a bearish chart pattern occurs and falsely signals a reversal of the rising price trend. What you see is a reversal pattern that has formed on an uptrend. You think price is going to fall and continue down, and it doesn't. Price begins to trade sideways or goes back up. Usually you missed a support or missed the overall uptrend, and you should have bought the dip instead of shorting the stock.

Bear trap trading is taking a bearish position on a stock because you believe it's going to go down. Traders look for bearish patterns such as bear flags or bear pennants so that they can take a short position on it and get paid when the stock drops in value.

What happens sometimes to these traders though? BAM! Caught in the trap!

The trade ends up becoming a losing position, and they get stopped out. Trading is a battle between the bulls and the bears. As a result, each side constantly vies for power. Do you know how to spot bear traps? Don't worry, we'll teach you to spot these bear trap stocks.

bear trap trading

The bears set some traps intra-day on $BYND after it had ripped most of the morning. The stock sold off, creating some bear flags, and eventually, the bear flags failed at support and trapped shorts.

1. Shorts Get Trapped

Short traders get trapped. And it causes a short squeeze - meaning those traders need to cover the shares they shorted and it causes the stock to  rocket up. When you can spot short squeezes, you can make some pretty good money from the momentum. I check the short float by using my trade ideas scanner.

With trading you use technical analysis and patterns to predict the movement of a stock. There's no magic formula that will predict the way a stock is going to go 100%, but you can have a higher probability trade if you are systematic in your approach. You need to know patterns and have great risk management. The only way you're going to get that is if you study, and our site has everything you need in one stop.

Alright, so bear trap trading tends to occur at the market open. With all the volatility in the first fifteen minutes, the direction of a stock could go either way. But basically, it can happen at any time frame too, the bottom line is it hits support, and dips slightly below, and bears jump the gun thinking support has broken and a new down trend has formed.

That's why tools like Fibonacci retracements and volume indicators are quite helpful in identifying traps for either bulls or bears. Have a system in place to manage that entry in case it doesn't work out the way your planned. 

How to avoid traps in the stock market

2. Short Selling

Bear trap trading happens when short sellers want to make money but the bulls aren't finished with the stock yet. Shorting is when you borrow a stock from your broker to buy back at a lower price. It's simple to do, as long as you understand how it works and use proper risk management. 

You never technically own the shares because you're borrowing them from your broker and selling them to someone else.It's kinda like borrowing your buddies tools, doing a job with them, making some money, then returning them in pristine condition. The reason your broker is willing to lend you the shares is, someone else, typically a LONG term investor is sitting on shares. He is willing to rent them out to his broker, for a fee, that the broker passes on to you when you borrow the shares. The broker gets paid when he handles the transactions, like a middleman. 

If you're going to short, do yourself a favor and short at a strong resistance level. Daily, weekly, hourly levels tend to hold more weight. 

3. Making Money on the Way Down

So as you now know, with shorting a stock, you need the price to move down. You got a good entry. As price falls you want to know where support is ahead of time. Once price hits the support you identify, or the one you MISSED and didn't know about, you cover your position. By covering, you're buying the shares back at the cheaper price. Those shares then go back to your broker. As long as you bought back the shares at a cheaper price, everyone made profit.

Avoid the bear traps in trading to increase your odds of getting that profit. However, there will be times you open new positions and you'll still fall into a bear trap. If you're caught in this situation, then you  need to cover your position to minimize loss. Don't let it run away.

Short selling is risky because technically you could lose your shirt. If you're shorting a biotech stock the price could go up 100's of percents by the time you check the price. If you go long, a stock can't go below zero so you'd only lose what you put into the trade.

Again, with shorting, a stock can keep going an unlimited amount. Therefore by not covering your losses quickly you have the ability to lose an infinite amount of money. This is why people use stop orders, or avoid shorting.

BEAR TRAP

As you can see here there is a very tricky channel down that broke out to the upside. Bears got trapped!

4. Put Options and Bear Traps

Put options are another way you can get caught in bear trap trading. Options give you the right but not the obligation to buy (call) or sell (put) a stock at a set price within a certain time frame.

As a result, taking the put side is taking a bearish position. There are many brokers who aren't great shorting brokers, because they don't have the shares available to short. However, the majority of brokers allow options trading, which essentially let you do the same thing, but in a safer way. Though you can still get caught in the bear trap while trading options. The patterns are the same.

Since options are deteriorating over time assets, picking the right direction is important. In fact, choosing the wrong direction can result in the loss of the entire trade, if you hang onto it. If you get caught in the bear trap while trading, close out the trade and don't let it run in the wrong direction. There is always another trade.

Options have more moving parts than a stock. That makes them both more profitable and more risky. Take our options trading course to learn more about trading options.

How Do I Stop Bear Traps When Trading?

  • The best way to stop bear traps when trading is to first off know candlestick patterns and support and resistance levels. Also, have mental stops in place before taking a trade, and stick to them. Bear traps are relative to your trading time frames so look for reversals on specific time frame for your specific trade plan.

1. Bear Trap Trading Tools

You'll encounter bear traps more often the longer you trade. They will always be there. The goal is to recognize the trap and to avoid it. That's why having great technical tools are so important...

Many times traders want to get an early jump on a move to make more profit. Greed can suck you into a bad trade. I use Trendspider to check multiple time frame charts vs different time frame candlesticks on the same chart. It's helps a lot.

Volume is a great indicator of a trap being set. If you see a a break down in price with low volume, don't play that move. It's not enough selling pressure to indicate a problem.That's a serious clue that a bear trap may be in place. You need increasing volume during the change of a trend in order for it to be valid, and feel confident.

Using Fibonacci retracement tools are another great tool for identifying a trend reversal. If price doesn't break key Fib levels, than it's more probable than not that bear trap is about to occur.

Using MACD or RSI is another tool to identify bear trap trading. Price can fall but the MACD or RSI is still bullish. However, this is a lagging indicator so make sure you have confirmation. If price is falling but the divergence is still bullish, than it's probably a trap. We teach how to trade both bullish and bearish setups live each day in our trading rooms. Take a look at our trading service to see more. Watch out for those bear trap stock plays and learn how to short the market properly with our trade rooms.

Avoiding Traps in the Stock Market Like the Matrix

2. Be Careful Bear Trap Trading

Bear trap trading isn't going to be 100% avoidable, and being careless or dangerous with it is preventable. Indeed, with the right training you can learn the tools and techniques used to identify possible traps. It's called a bear trap because the pattern lures short traders to take a position only to have price go back up. Using proper risk management helps to keep any losses at a minimum! Stay safe out there and leave a comment below or share this post and help someone else!

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