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What is a Bear Trap?

A “bear trap,” which takes its name from the “bear market,” indicates an incorrect indication that the rising movement of an index or a stock has started a serious reversal – but it has not. This kind of trap can often be seen when there is a bear market [1] reversal, and short sellers are firmly convinced that the markets will begin a drop back into a waning pattern. In a bear trap [2], however, when the market actually keeps rising, any short sellers become “trapped.” They are then required to pay to cover their positions… and to do so at higher costs.

Remember that a bear market is a market situation in which the pertinent investment prices are falling, and there is a broad sense of doom and gloom that causes the market pessimism to become something of a self-fulfilling prophecy! As investors come to expect more and more losses in a bear market, and as selling continues, the negative expectations only increase.

However, a bear market is not the same thing as a correction, which is a shorter-termed trend that will generally last less than a couple of months. Remember that while corrections can be a nice time for an investor to discover a market entry point, actual bear markets [1] cannot usually be expected to provide them. In addition, a bear trap can cause a short seller to become caught in a tough situation when working with a bear market, so caution is indicated.