What is Bear Trap?

Beartrap, also known as a bear trap, is the intentional action of large organizations to trap small traders from selling in the market. They make you think this is a sell setup, and when you do what they want, then they start to buy up causing you to stop losing. This happens in the market every day and that is how traders organize trading in the market.

Why does the price trap happen?

In the market, losers must have winners. Trading is like poker. You must play better than your opponent to win.

Poker players need to have a careful, tight, stable mentality, know how to read psychology, have a strategy. The way of betting is an important factor in helping players win in poker, many people bet innocently and make them lose money. This is also the factor that makes poker so psychological game.

The transaction is similar. As more and more traders know and use different types of trading setups, the larger institutions will know where small traders focus on trading. They will then set up price traps in these regions.

Can we avoid the price trap?

In fact, we can still avoid it, but only to a certain extent, not completely.

To learn how to avoid price traps, you need to understand how price traps work. We will talk about the bearish trap, and the bullish trap, think otherwise.

First of all, to create a bearish trap, the market cannot have too many large players. This is because implementing the bearish trap requires large organizations to move the market. Doing this requires a huge amount of capital.

So if there are many big players in the market, they run the risk of going against each other, and that's not what they want. So they only target markets where they can easily move prices. And those are the less liquid markets.

When a market has poor liquidity, it allows these large institutions to move the market the way they want. So the first way to avoid bearish traps is to avoid poor liquid markets.

That is also why in the forex market you should avoid exotic pairs if trading intraday. Or avoid stocks with poor liquidity in the stock market. In these less liquid markets, the big player will be the controlling player. That means it will be easy for them to move prices. So if you trade there, they'll bait and trap you all day.

For a bearish trap, “prey” is required before large organizations can set it. So what is the prey here in particular?

Those are the trading settings.

For example, it is said that a trading system becomes ineffective if everyone trades it. And this is also true to a certain extent.

The Turtle trend-trading system, for example, is not as effective as it used to be because it became so popular. While it is said that it still works well, it can be seen that the returns have decreased significantly as it has now become the target of the algorithms. Even Richard Dennis stopped trading completely because the trading system itself was no longer profitable as before.

It can be seen that, when a transaction setup becomes too common, it becomes the target of large institutions. That is also the reason you should avoid any trading strategies that are too popular.

How is the price trap formed?

To see the large organizations designing trader price traps, we look in more detail from Depth-of-Market - DOM.

Before letting their prey trap bearish, the big players manipulate the Bids and Offers orders so you see a weak market. Like the example below:

As shown above, you can see that the price side of the Offer is a larger transaction volume than the Bid price side. Just look at this DOM table to see we won't want to buy up at all, right ?. Because too much offer shows that selling pressure is more than buying pressure.

But is this really true? Because that could be where the big players are soliciting you to sell.

So, if you find a setup on the chart that looks ripe for you to sell, then the price will find a buy zone. Once you sell, the DOM will change like this:

You will notice that the Bid price is even thinner. This makes you feel more confident about your sales.

Then, as you follow the transactions that are going on, you notice a 50,000 buy at the price of 1.49. So, theoretically, 1.49 will flip and become the Offer price. But it is still the Bid price. The DOM now looks like this:

After that, another transaction was conducted at 1.49 with 70,000 shares. Will this time 1.49 become the price of the Offer? But no, it is still Bid and DOM price now as follows:

1.49 is still Bid price with a bid price of 30,000 shares. So what's going on? The answer is that you have fallen into the trap.

The big players have placed an Iceberg Order at 1.49 to secretly buy a position.

Let's talk a little bit about this iceberg command. The iceberg command is a large single instruction broken down into several smaller limit instructions (usually using an automated program) that is intended to conceal the actual volume of instructions.

And they intentionally make the DOM look like the seller at the strong offer so that those who see it will make the sale. And when we sell, that's when a large institution builds a long position. This is how the big players build their positions.

Since their size was so large, they couldn't show it to the Order Book.

For example, if you see order at Bid 1.48 for 2,000,000 shares, you will most likely want to be one step ahead of placing your buy order at 1.49 or even 1.5 right?

That's why big players have no choice but to discreetly build their positions. And once they've built a big enough position, they'll make a move like this:

Suddenly you will notice that the quantity sold at the Bid price becomes too small while the amount bought at the Bid price becomes too large. Why is that?

This is because the large organization simply withdraws the order from the offer price and then adds it to the Bid price.

At this point, you will realize that you, like other traders, are starting to hope to exit the market at breakeven or small losses.

But the big players won't allow that because they've just built a position and they have to make money too. So they pushed the market as they wanted. Like the DOM below:

When you and other traders cannot stand it, you will exit your positions. This in turn motivates the market to go up.

And that is exactly how a bearish trap comes into being. The same is true in the foreign exchange market, but on a larger scale.

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