Bear Trap – How To Trade Bear Traps?
Bear trap is a candlestick pattern in which sellers or bears try to push
In other words, bear trap is a false trading signal which causes traders to open a short position close to support areas in hope for short term profit.
Therefore, price breaks the support and breakout traders jump in with their sell orders and push the price even lower. Furthermore, buyers or bulls which have many buy orders cause the price to rise and trap traders who had short positions.
most of retail traders tend to look for trading opportunities which have a good profit in a short period, and this mindset causes them to be the first victims of bear traps.
the introduction of Artificial intelligence (AI) and especially quantitative trading bots to financial markets in recent years, caused breakout trading profitability to declined.
usually, these trading bots not only can see the depth of market orders but also trap traders in main support levels which cause bear traps.
Bear Trap Price Action
generally, we can consider six stages for a typical bear trap candlestick pattern. These stages could have a few changes in different bear trap situations.
In fact the importance of the support level (e.g. Moving averages,
Pivot point, weekly or monthly highs/lows, Horizontal resistance lines, etc.) and price action itself can change the bear trap formation.
- Price goes down, and when it reached the support level, it will break the support and move below it a little bit.
- Then breakout traders start to short the market and help the price go lower.
- So bulls buy limit orders will be filled and because of lack of bearish momentum, the price quickly stops moving lower.
- Further, some of the breakout traders panic and close their short positions.
- Also, many of them open long positions to compensate for their losses and cause the price to go higher.
- Finally, when the price reached to swing high which many short sellers put their stop losses, the price will hit their stop losses and shoot the price even higher.
Bear Trap Patterns
Some traders claim there are bear trap patterns which you can easily identify them. But in reality, we have different bear trap patterns on each market (Stock, Forex, Cryptocurrency, etc.).
Moreover, bear trap candlestick patterns are subjective and heavily depend on which time frame you’re analyzing them on it.
in the below image we represented various types of bear trap patterns.
How to Avoid Bear Traps
Every problem has several solutions and bear trap is not an exception.
to avoid bear traps and reduce your risks whenever you’re trading breakouts, you should consider these bear trap trading tips.
1. Learning Technical Analysis
understanding technical analysis and chart patterns helps you to identify some trading setups with high win rate.
e.g. in a descending triangle chart pattern, there is a high probability that price would break the support line and go lower.
So if you know these bearish chart patterns, it will help you to understand the situation better and tailor your expectations toward opening a short position near a support line.
2. Using Risk Management Techniques
To prevent from a bear trap and large capital losses, always consider a proper position size and never open a position with your whole capital at once.
Choosing an appropriate position size depends on your risk tolerance and market that you’re trading on. Generally, it’s better not to risk over 2-5 % of your capital in a trade.
Moreover, you can ladder your position to mitigate your risk. e.g., you can buy 50% before resistance level and buy the remaining 50% after the breakout to decrease your losses.
3. Learning Pullback Trading
If you’re trading for long term profit (position trading or swing trading) and not short term profit (day trading), then you have an obvious choice, and it’s buying the price pullback.
Professional traders always use this technique to avoid bear traps.
Instead of opening a short position near a support zone, you should wait till price pass that support and then put your sell order after it retraced to a proper resistance level.
4. Using Volume Indicators
Volume indicators (e.g. OBV, CMF, and etc.) are very useful for understanding buying and selling pressure and also identifying fakeouts and bear traps.
bear traps usually happen quickly and have low volumes, So price fell suddenly with relatively low volume then after a few minutes rises again sharply.
in OBV indicator article we explained some strategies which can help you trade breakouts better and don’t fall to bear traps anymore.
5. Setting a Tight Stop Loss
Setting a tight stop loss helps you to prevent a large capital loss in breakout trading. You should put a stop loss after opening your short position or have a mental stop loss to use when it’s needed.
Putting a stop loss order in breakout trading have a little more risk. Because stop loss hunters know where a majority of traders put their stop losses, therefore, they’ll cause the price to rise quickly and hit those stop losses.
So, it’s better to have a mental stop loss and use it when you realized that the trend is not bearish anymore and price is going to rise soon.
6. Learning Sentiment Analysis
If you want to find trading opportunities with high success probability, you should always consider sentiment analysis in
Sentiment analysis works on every market (e.g. Forex, Stock, Cryptocurrency, etc.) So, you should know market dynamics good enough to understand its sentiment.
one of the essential skills for every trader is analyzing a market sentiment, and whether the overall trend is changing from bearish to bullish or not.
Bear traps usually happen more in bull markets, because in this condition there are lots of buyers in the market and those traders who try to trade against the trend get caught up in bear traps most of the times.
Bear Traps and Liquidity Pools
Understanding the concept of liquidity pools helps traders to prevent from big bear traps.
If you want to fill a big buy order at a certain price, you need lots of sellers to sell to you. So, you should generate a fake supply in that price area and trap short sellers there.
When big players (institutions, wales, etc.) want to fill their buy orders at critical price levels, they usually push the price a little bit in opposite direction to generate fake supply.
The bear trap happens in these situations. in the below example we’ll explain liquidity pools in details.
How To Trade Bear Traps
I guess after reading the above sections; you realized the best way to trade bear traps is not trade them at all!
But in order to be a profitable trader keep these tips on your mind:
- don’t short sell market on major support areas, and don’t put buy orders on important resistance lines.
- change your mind from chasing trading setups with short term profits, and instead focus more on designing a good trading plan and look for setups with long term profit.
I’m not telling you day trading is bad or you should not trade breakouts. I’m just trying to tell you that if you’re a novice trader, it’s better to focus on trading setups with lower risks.