Bear Trap
A bear trap is a false sell signal: price breaks below support, draws in sellers, then turns back up. Who gets caught, with a worked example.
A bear trap in trading is a false sell signal: price breaks below support, draws in sellers, then turns back up.
Explained simply
Think of a false fire alarm: people rush out, the alarm stops, and those who left are stuck outside while everyone else carries on. The break below support is the alarm, and the recovery is everyone else going back to work.
Key takeaways
- Who gets caught: traders who sold, or opened a short position, as the level broke. As the price recovers, their losses grow, and their buying back to close can speed up the rise.
- Example (illustrative): support sits at 100, the price falls to 97 and sellers pile in, then two sessions later it trades at 104. A short opened at 97 is 7 points down.
- Only clear in hindsight: many traders wait for a close below the level, not an intraday dip, before treating a break as real. No check removes the risk, and a level the price crosses back and forth is called whipsaw.
- Related traps: its mirror image is the bull trap, a false break above resistance. The opposite mistake in a falling market is the dead cat bounce, a brief recovery that tempts buyers before the fall resumes.
A bear trap in numbers
The figures below are illustrative. They follow one trap from the level to the moment it closes.
Stage | Price | What happens |
|---|---|---|
1. The level | 100 | The price has turned up from 100 several times, so traders watch it as support. |
2. The break | 97 | The price drops through 100. Holders sell, and new short positions open at about 97. |
3. The turn | 101 | Selling dries up and the price climbs back above 100. The break has failed. |
4. The trap closes | 104 | Two sessions after the break, the price is 104. Short sellers buying back to close add to the rise. |
Read the table from the short seller's side. Opened at 97, the position loses 1 point for every point the price rises: at 101 it is 4 points down, and at 104 it is 7 points down. On a position of 10 units, 7 points is 70 in the account currency, before costs. A trader who stayed out sees the same move as a test of support that held.
Bear traps tend to form at levels many traders watch: a round number, a previous low, the bottom of a range. Stop-loss orders often sit just below such a level, so a quick drop through it can set off a burst of selling that runs out as soon as those orders are filled.
The recovery can be quick for a simple reason: every short opened on the break is a future buy order. When the price turns, those traders have to buy back to close, and if many of them close at once, their orders push the price up on top of any new buying.
On Ouinex
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