How To Avoid Crypto Bear Traps
Bitcoin is fast approaching fresh all-time highs, and those who have held onto their crypto are now reaping the benefits. With that said, HODLing has not been easy in recent times. There have been many crypto bear traps along the way, which would have prompted even the most “diamond handed” of holders to consider selling at some point.
In this article, we will discuss how to:
- Identify bear traps
- Avoid falling for them
What is a bear trap?
As the name suggests, a bear trap is a trap for bears. In the crypto market, this would induce traders to open short positions as they expect the market to go lower.
For example, on 20 July this year, bitcoin closed a daily candle below $30,000. Here, traders would have had a valid reason to be bearish, as bitcoin closed a daily candle below a key support level:
Bitcoin’s major bear trap in July 2021.
Bear traps don’t just trap short sellers. They can also cause holders to throw in the towel and sell their holdings.
Why “Whales” create bear traps
It’s no secret that large whales run the crypto market. And for them, trading hundreds of millions in crypto can be difficult without sufficient liquidity in the market. This is because their large buy orders would push the price higher, causing them to pay more for their coins.
Therefore, if large whales want to get in the market, they are incentivised to create bear traps. Here, they can push the price down with derivatives and then buy the panic. And because this creates a lot of sell pressure, they have more liquidity with which to buy crypto.
How to identify potential crypto bear traps
Avoiding bear traps is one of the hardest things to learn in trading. Why? Because traps are designed to trick you!
I know because I’ve fallen for my fair share of them in the past.
In order to avoid a bear trap, we first must first identify the potential for one. This is difficult to do with technical analysis alone, so we should consider other factors.
For example, on 20 July this year, bitcoin initiated a bear trap by closing a daily candle below $30,000. Most technical analysts (myself included) would have interpreted this as a bearish sign.
However, when we consider the crypto market is run by whales, it would seem plausible that the daily close below $30,000 could potentially be a bear trap. Knowing this fact, it would have paid to be patient, and wait another day or two before making a trading decision.
Bollinger Bands and traps
Bollinger Bands are one of my favourite tools for identifying traps. The below chart explains how Bollinger Bands could have helped us identify the July 2021 bitcoin trap.
Example: using Bollinger Bands to identify the bitcoin bear trap of July 2021.
Confirming a bear trap
In my experience, it is better to wait for confirmation of a bear trap before “buying the dip”. I have found the 21 exponential moving average to be very useful here.
The below chart explains how we could have used the 21-EMA to confirm the same bear trap. This confirmation only occurred on 23 July, so there was a couple of days to wait. With that said, it is better to be safe than sorry!
Example: confirmation of a bitcoin bear trap with a daily close above the 21 EMA on 23 July 2021.
Conclusion:
Bear traps are common in crypto and they occur on many different time frames. By learning not to fall for them, we stand a much better chance of achieving long term success in the crypto market.
The usual disclaimer: Nothing you read here is investment advice. It’s just for information and entertainment.
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