What is a 'Bear Trap'

A Bear Trap is a technical pattern that occurs when the performance of a stock or an index incorrectly signals a reversal of a rising price trend.


A Bear Trap can prompt a trader to expect a decline in the value of a stock or index, prompting them to take a short position on the asset. When this phenomenon occurs, however, the value of the asset stays flat or begins to recover. The trader shorting the asset would then be said to be caught in a bear trap.

The reverse of this circumstance, in which the reversal of a declining trend is falsely signaled, is known as a bull trap.

Investors often rely on technical patterns to analyze market trends and inform investment strategies. While a bullish trader may sell a declining asset immediately in order to retain whatever profits they have made, a bearish trader may attempt to short that asset with the intention of buying it back once the price has dropped to a certain level. If that downward trend never occurs or reverses after a brief period, the price reversal is identified as a bear trap. Most traders who get caught in bear traps tend to do so early in the trading session, and analysis of opening bell trends can indicate how frequently a particular asset falls in value, and at what time of day.

Technical traders attempt to identify bear traps and avoid them using a variety of analytical tools, including Fibonacci retracements, oscillators, and price and volume indicators. These tools can help traders understand and predict whether the current price trend of a security is legitimate.

Short Selling and Bear Traps

A bear is an investor or trader in the capital markets who believes that the price of a security is about to decline. Bears may also believe that the overall direction of a capital market may be in decline. A bearish investment strategy will be to attempt to profit from the decline in price of an asset, and one way that investor may implement is by taking short position on that asset.

A short position is a trading technique that borrows shares of an asset from a broker via a margin account. The investor then sells those borrowed shares with the intention of buying them back when the price drops. The intent in this strategy is to profit from the decline in price. When a bearish investor incorrectly identifies the decline in price, they run the risk of being caught in a bear trap.

Short sellers with bearish tendencies are compelled to cover their positions as prices rise in order to minimize losses. A subsequent increase in buying activity can initiate a rally, which can continue to fuel the upward momentum in price for the asset. After the bearish short sellers purchase the shares required to cover their short positions, the upward momentum of the asset tends to decrease, and can begin a period of decline in price, putting the short seller in precarious position.

Short sellers risk maximizing their losses or triggering a margin call when the value of a security or index continues to rise. Investors caught in this position are advised to consider a stop-loss order when executing trades as a preventative measure against the heavy losses that can result from a bear trap.

  1. Bull Trap

    A bull trap is a false signal indicating a declining trend in ...
  2. Bear Market

    A bear market is a market in which securities prices fall and ...
  3. Bear Closing

    Bear closing is purchasing a security, currency or commodity ...
  4. Liquidity Trap

    The liquidity trap is a situation in which prevailing interest ...
  5. Bull

    A bull is an investor who invests in a security expecting that ...
  6. Bear

    An bear is an investor who believes that a particular security ...
Related Articles
  1. Investing

    Avoid These 3 Value Trap Stocks

    Investors are wise to do their homework and avoid the following companies that might be value traps.
  2. Investing

    Rules and Strategies For Profitable Short Selling

    Short sales work well in bull and bear markets but strict entry and risk management rules are required to overcome the threat of short squeezes.
  3. Trading

    Profiting in bear and bull markets

    There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage.
  4. Investing

    Adapt To A Bear Market

    Learn how your portfolio should evolve to suit bear market conditions.
  5. Trading

    Know When To Hold, Know When To Fold A Short Sale

    Consider making a short sale in the following circumstances: Bearish trend is developing rapidly, fundamentals are deteriorating, technical indicators are signaling "Sell," and there is an abrupt ...
  6. Investing

    Don’t Panic When the Next Bear Market Happens

    Take advantage of the next bear market and watch your investment in great companies grow.
  7. Trading

    What is a Bear Call Spread?

    A bear call spread is an option strategy that involves the sale of a call option and simultaneous purchase of a call option on the same underlying asset.
  8. Investing

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  9. Investing

    Traps That Lead to Market Underperformance Part II

    There is a vicious investing cycle that impacts many young and first-time investors.
  1. How do you use put options to profit from a bear market?

    Learn how traders use put options in their trading strategies to remain profitable, even in a bear market. Everyday investors ... Read Answer >>
  2. Are We In A Bull Market Or A Bear Market?

    Rising price signifies a bull market while falling price signifies a bear market but the devil is in the details.. Read Answer >>
Trading Center