If you're a novice when it comes to cryptocurrency trading, there's a lot you need to learn if you want to be successful. If you're new to the financial markets completely, you definitely need to learn the ropes – just to make sure you don't make any otherwise avoidable mistakes.
What Is A Bear Trap
Today, we're going to talk about a common occurrence in the Bitcoin markets – the bear trap.
Bulls & Bears Markets
Just like any financial market, the Bitcoin market undergoes ups and downs. In fact, Bitcoin (and other cryptocurrencies) can be even more volatile than, say, the stock markets. The trick is reading these upwards and downwards movements and see them for what they are.
You've probably heard of the idea of “bull” markets and “bear” markets. The terms indicate market conditions that are either aggressive when it comes to increased value – bullish – or predictive of falling value – bearish.
As far as the Bitcoin market goes, it's been traditionally bullish, gaining literally thousands of dollars of value from around 2009, when it was just worth around $1 per BTC. As of this writing, the price of a single Bitcoin is closer to $2500 – and bullish investors have ridden this wave to untold riches.
The Trap Springs
Of course, those years of growth haven't been without their hiccups. The price of Bitcoin can peak and trough several times over the course of a day, but when there are a few days or weeks of consistent price drops, investors tend to get squirreley.
Fear of losing value in your investment can tempt you to sell off your holdings. However, a problem arises when momentarily bearish market conditions don't last long and instead rebound to their former price points or even higher.
This momentary dip is what we call the “bear trap” – a moment when selling your stocks in fear the price will continue to drop ends up being the wrong choice in the end.
Savvy investors watch the market carefully in an attempt to figure out if a downward trend is a legitimate correction or if it's just a bear trap waiting to spring. It can be difficult to spot one from the other, and even experienced Bitcoin traders can fall for a bear trap, convinced that the price per Bitcoin is going to finally drop.
The whole process is made even more complicated by how bullish Bitcoin has been overall. Many investors will let it ride during a bear trap, betting that the price will bounce back; experience has told them that it will. Of course, the problem is one day the price might not bounce back – which makes riding out what looks like a bear trap a gamble.
So how do you know if a certain market downturn is a bear trap? Sadly, there's no definitive way to identify one for sure. The best you can do is to hold on to your horses – and if you're trading during times of volatility, make sure you've got a stop-loss order in place so you can walk away with your original investment largely intact.