What is a Crypto Bear Trap?
Cryptocurrencies have intrinsically high price volatility. Therefore, cryptocurrencies can experience massive price fluctuations within short durations. At the same time, there is a possibility of bear traps when trading virtual currencies.
A bear trap is a situation when the majority of investors are under the wrong impression about an upcoming price reversal or downtrend. This can lead to considerable losses for investors and cause them to cash out their trading positions and loss the opportunity to make substantial profits.
How Does a Crypto Bear Trap Work?
Bear traps happen when investors purchase digital currencies hoping for price increment. However, the markets perform against their expectations resulting in considerable losses. Therefore, the investors can lose their entire capital value or suffer from massive losses.
This can happen for cryptocurrency investors when they acquire a given token hoping for a positive price movement. Instead, the price of the given digital currency continues to decline that leads to losses.
In some cases, prices can increment or reverse trend for a little while but continue to decrease in value.
Signs of a Crypto Bear Trap
There are some signs and signals that cryptocurrency investors can look for to detect and prevent crypto bear traps. In case, the spot prices are incrementing and print a big red candle it can be a sign for crypto bear trap.
Furthermore, the investors should check the price history of a digital currency that has reverted to its original price point after printing substantial gains. In such a scenario, investors are likely to cash out leading to sudden price decline.
Sudden increase in trading volume is another sign of a probable bear trap. In most cases, a sudden price incline followed by a massive price decline indicates that investors are selling their holdings resulting in a price crash.
Another important sign is the formation of head and shoulders pattern. This price trend can point towards an upcoming price decrease.
Impact of Crypto Bear Trap
Crypto bear traps are not good news for investors. For retail investors it could mean significant losses and probable bankruptcy. Therefore, it is imperative that investors conduct research to identify and avoid bear traps.
At the same time, the investors should be able to recognize when the price of an investment product has become overvalued. There is a strong possibility of bear trap ahead if the price of a given cryptocurrency rises suddenly.
It is best to refrain from investing in digital currencies that have undergone a sudden price hike. However, the investors should know that historical price performance does not always warrant the future price changes.
Therefore, the fact that a given cryptocurrency have undergone price appreciation for a while does not mean that it will continue to gain traction.
A sudden spike in trading volume or investors in a given digital asset is also a warning sign for bear trap. It can mean that a lot of inexperienced investors are purchasing a given cryptocurrency that can increase price volatility and unexpected price drops.
How to Avoid Crypto Bear Traps?
The best way to avoid bear traps is to conduct research before investing in a new cryptocurrency. It is necessary for the investor to recognize and list all the factors that impacts the prices of a given cryptocurrency in a positive or negative manner. At the same time, the investors should remain within their risk tolerance in order to avoid sustaining big losses.
Stop-loss orders are one of the best trading tools that safeguard the investors against massive price drops. Stop-loss allows investors to automatically dissolve a trading position if the price decreases below a predetermined threshold.
How to Deal with a Crypto Bear Trap?
It is possible that regardless of taking all the precautions and conducting market research an investor finds themselves in a bear trap. In such as situation the investors can try to remain calm and make the best out of the bad situation.
Since making profits is not possible, the best way left is to dissolve the position and retain the remaining value of the investment portfolio.
Alternatively, the investors can also wait for the prices to recover. The investors should ensure that there if there is a probability for investments to regain lost value and print gains after a while. When it comes to down-trending prices there is no concrete answer for various digital currencies.
In the case of big market cap digital currencies such as Bitcoin and Ethereum, the investors can wait safely for a recovery on account of considerable investment interest. In the case of small market cap altcoins such as BCH, it is best to cut losses and sell.
A crypto bear trap is a problem that every investor is going to face. The ideal way to deal with this issue is to learn about possible signs of a forming bear trap and use trading techniques to avoid it.