A bear trap happens when the market looks like it’s about to slide into a downtrend, tempting traders to sell in anticipation of further losses only for prices to suddenly reverse higher.
Those who sold expecting a deeper drop get “trapped,” often missing out on the rebound or, worse, taking losses if they shorted the market.
These setups often happen when big players, think hedge funds or institutional investors, throw their weight around. By unloading large amounts of an asset, they can spook smaller traders into panic-selling.
Once the price has been driven down, those same big players swoop in and buy at a discount, sending prices higher again. The traders who sold into the dip are left holding regret.
How does a bear trap work?
At its core, a bear trap is about false signals. The market flashes signs of weakness, a sharp price drop, a spike in sell volume, or even a wave of bad news, and traders assume the slide will continue. Many jump out of their positions to avoid further pain.
But instead of collapsing, the market finds support and turns around. Suddenly, the “bearish breakdown” turns into a fake-out, and those who bet on falling prices are stuck.
Some of the common tactics behind bear traps include:
- False signals: Sudden drops or unusual volume patterns that make it look like the market’s breaking down.
- FUD (fear, uncertainty, and doubt): Rumors, negative headlines, or social media buzz designed to stir panic.
- Large sell-offs: Big players dump assets to trigger a chain reaction of selling from smaller traders.
- Short selling pressure: Aggressive short positions that drive prices down temporarily, only for the shorts to get squeezed when the market bounces back.
Example
Bitcoin suddenly dropped from $100,000 to $80,000 after a burst of negative news. Many traders sell, fearing a crash. Then, within hours, Bitcoin rebounds to $102,000. Those who sold or shorted too early are “caught in the trap.
