Ask Colin

What is a Bear Trap?

I am not sure that I have ever seen it designed rigorously. My understanding is that it is a chart pattern in which a trading range forms. The price then breaks out downwards, which encourages bears to sell, thinking the next trend will be down. The price then rises back into and rapidly through the trading range and an uptrend develops. Thus there is a signal that bears take, then a price move that traps them on the wrong side of the market. The trading range may take the form of any reversal or continuation pattern from the textbooks, or simply a sideways movement of price.

The term might also be used generally for any situation in which bears are drawn into commitment to a move and then trapped by a sudden reversal that catches them committed to the wrong side of the market.