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  • What Is A Bear Trap?: Key Takeaways

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    Ali Abdelfatah Mahmoud
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    Bear Trap

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    19 views1 page

    What Is A Bear Trap?: Key Takeaways

    Uploaded by

    Ali Abdelfatah Mahmoud

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as doc, pdf, or txt
    of 1

    What is a Bear Trap?

    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.

    ‫طعم‬- ‫ شرك‬- ‫اغراء‬


    KEY TAKEAWAYS
     A bear trap is a false technical indication of a reversal from a down- to an up-
    market that can lure unsuspecting investors.
     These can occur in all types of asset markets, including equities, futures, bonds,
    and currencies.
     A bear trap is often triggered by a decline that induces market participants to
    open short sales, which then lose value in a reversal when shorts are forced to
    cover.

    How Does a Bear Trap Work?


    A bear trap can prompt a market participant to expect a decline in the value of a financial
    instrument, prompting the execution of a short position on the asset. However, the value
    of the asset stays flat or rallies in this scenario and the participant is forced to incur a
    loss. A bullish trader may sell a declining asset in order to retain profits while a bearish
    trader may attempt to short that asset, with the intention of buying it back after 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.

    Bear Traps & Short Selling


    A bear is an investor or trader in the financial markets who believes that the price of a
    security is about to decline. Bears may also believe that the overall direction of a
    financial market may be in decline. A bearish investment strategy attempts to profit from
    the decline in price of an asset and a short position is often executed to implement this
    strategy.

    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.

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