What are Bear Traps and How to Avoid Them?
Key Takeaways
A bear trap is a chart feature where short sellers of an asset are forced into an unprofitable or losing trade by price action.
Crypto markets are classic venues for bear traps, and they often appear on Bitcoin and altcoins across both short and long timeframes.
Traders who short a given token at the wrong time can find themselves holding an underwater position, and these positions can even be liquidated if the trader employs an aggressive strategy such as leverage.
Bear traps can often be avoided by consulting order book data and taking note of historically significant price levels.
Why do Bear Traps Happen?
Crypto bear traps can appear anywhere — no matter whether it is the one-minute or one-month chart being traded.
The probability of a trap forming depends on multiple factors. Key price levels — even psychological ones — tend to attract large amounts of liquidity, and thus provide fertile grounds for large-volume traders to manipulate the market.
Trend strength is also a factor for both bull and bear traps. A strongly-trend market heading toward a key psychological price point will likely attract such predatory liquidity moves moreso than a market experiencing a slower up or downtrend.
A third factor is time: if a significant price point has not been touched for an extended period, traders of all types will be all the more interested in taking full advantage of its return.
Crypto Bear Trap Example
With the concept of psychological price levels in mind, likely levels which could host a bear trap can be easy to find.
A classic example is Bitcoin, with its four-year halving cycles and patterned price behavior. Around once per four years, BTC/USD experiences a new all-time high — an event which tends to be followed by a period of consolidation.
Here, price returns below the low, and can dip significantly before the market consolidates and upside continues.
This consolidatory period is prime territory for large-volume traders, or whales, to set bear traps. As the name of the phenomenon suggests, a trap needs to be laid in order to ensnare its victim, and in financial markets, it is the smart money doing so.
In the chart below, BTC/USD is consolidating after hitting all-time highs of around $73,800. This consolidation goes on for weeks, during which price dips by more than 20% at one point, reaching $56,500.
This includes a violation of various trendlines which traditionally act as support in Bitcoin bull markets: the 21-day simple moving average, short-term holder cost basis and others.
It was the area around $60,000, however, which ultimately produced a classic bear trap. This had its roots in Bitcoin’s previous bull market from 2021. BTC/USD reached $58,000 in April that year before reversing, returning October for a retest and then finally setting an all-time high of $69,000 a month later.
This process left $58,000 as a key area of interest for traders, and once price violated it from above in 2024, it was not long before a bounce left late short positions marooned below it.
Price dipping below a significant price point in place for an extended period amid high volume amid an onslaught of late market entrants is a clear warning that a bear trap is in the making.
How Does a Bear Trap Work?
Bear traps punish those who choose to short an asset too late or who have lost faith in the market and decide to sell, often at a significant loss.
For those on the other side of the trade — including whales who can manipulate the market to revisit levels which spark the above behavior — this is a lucrative operation.
The goal of bear traps is to make speculators sell at cheap prices before the market bounces, while late shorts are forced into liquidation or holding underwater positions.
How market manipulation sets up bear traps is worth noting specifically for crypto traders. Unlike traditional financial markets where the practice is banned, a process known as “spoofing” is commonplace on crypto exchanges. This refers to large-volume traders deliberately shifting significant amounts of liquidity up and down in order to attract price toward it. It is then removed once the desired move is achieved.
As can be seen, bear traps are primarily a psychological game — it is market participants who decide the significance of a given price point.
How to Identify a Bear Trap
In order to preempt possible future bear traps for a given asset, several phenomena need to be monitored.
Liquidity, volume and short interest are three important elements of a market which can help traders avoid falling victim to manipulation.
When price falls below an important psychological level, volume increases as shorts open and traders bet on a deeper drop. This is all the more apparent if price takes a large amount of liquidity at that level.
If liquidity is added at a certain level as price heads toward it, it can be seen not as genuine interest, but an attempt to manipulate the market to reach that level. Such liquidity operations can occur in either direction, and is known as “spoofing.”
BTC/USD chart on TabTrader Web
Against this manipulative background, whales — the “smart money” — are watching for a suitably advantageous entry point, and aggressively buy, to the extent that price instantly rebounds and leaves late shorts exposed and underwater.
The most extreme iterations of the above process tend to be seen in reverse, however, in the form of bull traps tied to assets which have amassed a sudden cult following. Examples include meme stocks and meme crypto tokens. Here, early investors tend to hold considerable sway over sentiment, and regularly manipulate whole markets in order to trap latecomers attempting to cash in on the trend.
How to Avoid a Bear Trap
In order not to fall victim to manipulatory activity when trading crypto around key levels or during episodes of heightened volatility, it is necessary to have prior knowledge of which price levels are particularly susceptible.
Bitcoin, Ether and other major altcoins all have publicly-accessible trading history which is easily available within the TabTrader app. Analyzing price behavior at specific levels over time helps preempt similar episodes in the future. Using support and resistance indicators can help traders understand market psychology.
Avoiding bear traps nonetheless depends to a great extent on a trader’s ability to rise above psychological pressure. Trading on emotion — particularly when the majority of the market appears to be doing likewise — is a surefire way to make poor decisions and lose money.
Difference Between Bear Trap and Bull Trap
Bear traps have a counterpart used for effecting the same result on buyers during uptrends: the bull trap.
The process here is much the same, and as with bear traps, bull traps rely on trader psychology to work. They can appear at the end of an uptrend as smart money attempts to trap late buyers above macro highs. These buyers then spend a much longer time waiting for the market to return to their entry levels.
Crypto has various well-known examples of bull traps, making it all the more necessary for traders to learn how to avoid them. Bitcoin, for instance, took two-and-a-half years to hit $69,000 after initially reaching that level in November 2021. Those who bought at the time were forced to hold underwater positions until March 2024.
Conclusion
Bear traps are a common phenomenon across cryptocurrency markets. Traders need to be aware of how and where they can form in order to avoid making poor decisions and losing money.
Bear traps form around price points which hold significant psychological meaning within traders’ minds.
This is important, as market psychology is what makes bear traps profitable for those who “set” them — smart money looking to capitalize on others who are trading on emotion.
Such entities are often large-volume traders with enough capital to move the market with the size of their orders. They take advantage of panic when price dips below a level considered as infallible support. Traders who open last-minute short positions or who sell at the lows find themselves sidelined or liquidated as large-volume players buy, pushing price up quickly.
The impact on traders can be especially painful if they are using leverage to increase potential profits from a winning trader. TabTrader recommends that users acquaint themselves with the technicalities of leverage before deploying it within their strategy by reading the dedicated guide.
How to Trade Bear Traps with TabTrader
TabTrader’s intuitive all-in-one terminal makes it easy for crypto traders to identify bear traps and stay on top of order book trends.
Using volume data allows users to map reactions to key price levels in real time, while the unified, easy-to-use interface makes important order book data stand out regardless of the asset or exchange.
Follow these simple steps to turn bear traps to your advantage on the TabTrader app:
- Log in to your TabTrader account or create a new one
- Learn more about bear traps with the TabTrader Academy
- Open a chart and start hunting for bear traps using historical data
- Link your exchange accounts to TabTrader
- Start trading!
Crypto markets are notoriously volatile and bear traps can come and go in an instant. TabTrader gives you edge: trade hundreds of currency pairs on the world’s biggest trading platforms live, from one convenient terminal — whether at home or on the go.
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FAQ
What does bear trap mean?
‘Bear trap’ refers to the phenomenon of late short sellers of an asset being denied a profitable trader or an exit below a key psychological price point. The market rebounds, leaving those betting on further downside stuck.
What is a bear trap in crypto?
Bear traps in crypto are extremely common — especially on more volatile assets such as meme tokens or when price reaches a significant psychological level. This is in part due to order spoofing on exchange order books – the delibate shunting around of liquidity which is banned on mainstream markets.
Is a bear trap bullish?
Bear traps can be considered as a form of market bottom formation, particularly during consolidatory phases within a broader uptrend. The process tests the conviction of those who may have only faint belief in the uptrend’s longevity.
What is the difference between a bear trap and a bull trap?
Bull traps involve the same style of order book game as bear traps, but in the opposite direction. Here, it is late longs which are trapped at long-term highs, classic victims being buyers of meme tokens at the height of a craze.
