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What Is A Bear Trap?: Key Takeaways
What Is A Bear Trap?: Key Takeaways
A bear trap is a technical pattern that occurs when the performance of a stock, index, or
other financial instrument incorrectly signals a reversal of a rising price trend. The trap is
thus a false reversal of a declining price trend. Bear traps can tempt investors into taking
long positions based on anticipation of price movements which do not end up taking
place.
A short position is a trading technique that borrows shares or contracts of an asset from
a broker through a margin account. The investor sells those borrowed instruments, with
the intention of buying them back when the price drops, booking a profit from the
decline. When a bearish investor incorrectly identifies the decline in price, the risk of
getting caught in a bear trap increases.
Short sellers are compelled to cover positions as prices rise in order to minimize losses.
A subsequent increase in buying activity can initiate further upside, which can continue
to fuel price momentum. After short sellers purchase the instruments required to cover
their short positions, the upward momentum of the asset tends to decrease.
A short seller risks maximizing the loss or triggering a margin call when the value of a
security, index or other financial instrument continues to rise. An investor can minimize
damage from bull traps by placing stop losses when executing market orders.