How to Spot and Stay Away from Cryptocurrency Bear Traps

Cryptocurrency prices are notoriously volatile, with massive runs and crashes often catching traders off guard. 

However, not every dramatic dip marks the start of a prolonged bear market. Sometimes, prices plunge simply to trap bearish traders into opening short positions right before another leg up. 

These hazardous situations are called ‘bear traps’. Read on further to learn what bear traps are, how to spot them, and techniques to avoid being caught in one.

What is a Bear Trap?

Bear trap refers to a deceptive short-term price decline that makes it appear like the cryptocurrency has begun a significant downtrend. 

The dip is merely a pause in an overarching bull market. Bear traps are also known as false reversals, since they suggest breaking the key support levels and beginning a trend change from bullish to bearish. 

The sharp drop tempts traders to open short positions to profit from the supposed start of a downward movement. As the price recovers, bearish traders exit at a loss, kicking off a wave of buying activity that drives the price even higher.

Causes of Bear Traps-

Enlisted below are a few common reasons for cryptocurrency bear traps:

Traders sometimes deliberately sell large amounts of coins to push prices lower before scooping them back up at bargain prices. This tricks less experienced traders into panic, selling into what they assume is the start of a crash.

Breaking news can impact prices across the crypto industry. Bear traps occasionally form around announcements that initially worry traders before being deemed as insignificant.

• Investor Sentiment Shifts

With cryptocurrency dominated by retail investors, changes in crowd psychology can heavily influence price action. Sudden shifts toward fear and uncertainty can prompt traders to sell coins despite healthy market fundamentals.

Spotting An Impending Bear Trap

While bear traps take many traders by surprise, paying attention to specific indicators can help in detecting an upcoming trap:

Substantial trading volumes usually accompany genuine trend reversals as investors rush to close positions. Bear traps, on the other hand, tend to occur alongside average, or even below-average volumes. This signals that only a small group of traders are driving the declines.

Cryptocurrency bear traps frequently form out of the blue without significant fundamental developments like security breaches, network problems, or policy changes taking place. If a coin falls significantly without a clear justification, it may be a trap.

Bull market pullbacks tend to find support near key moving averages before prices bounce back. If a coin breaks below these levels but immediately reclaims them, it most likely signifies that the traders are testing the waters and confirms bullish momentum remains intact.

Protecting Yourself From Bear Traps

Bear traps are hazardous for traders caught off guard. But several precautions can help mitigate the risks:

Stop-loss orders automatically close out positions once prices fall to predefined levels, capping maximum losses. Smart stop placement allows riding out routine volatility while preventing significant drawdowns.

Take-profit orders lock in returns by automatically selling coins once prices hit set target levels. Even if a bear trap turns into an actual reversal, taking profits off the table still allows benefiting from most of the upside.

Trading in small position sizes reduces the overall risk exposure from any single play. Lower potential losses make sticking to a trading plan easier, even amidst whipsawing price action.

Conclusion

Albeit potentially deceptive, bear traps are unavoidable in cryptocurrency price action. 

However, careful trend analysis, disciplined risk management, and controlled position sizing traders can help in avoiding disastrous losses. 

Taking simple precautions makes it possible to side-step bear traps and even turn them into profitable opportunities. With adequate knowledge and preparation, these trends can often be even helpful!

Adarsh Singh is a true connoisseur of Defi and Blockchain technologies, who left his job at a “Big 4” multinational finance firm to pursue crypto and NFT trading full-time. He has a strong background in finance, with MBA from a prestigious B-school. He delves deep into these innovative fields, unraveling their intricacies. Uncovering hidden gems, be it coins, tokens or NFTs, is his expertise. NFTs drive deep interest for him, and his creative analysis of NFTs opens up engaging narratives. He strives to bring decentralized digital assets accessible to the masses.