When a stock declines, attracting heavy selling and then suddenly surges trapping all those who have heavily sold the stock short. These short sellers then are forced to buy the stock to cover their position, which takes the stock price further up.
The predicament facing short sellers when a bear market reverses its trend and becomes bullish. The assets continue to sell in anticipation of further declines in price, and short sellers then are forced to cover at higher prices.
This occurs when prices decline through a previously identified key support level (perhaps a triangle base) but is immediately reversed causing short positions to be stopped out and therefore is considered as providing a false bearish signal.
A bear trap occurs when prices break below a significant level and generate a sell signal, but then reverses direction and hence invalidate the sell signal. Bear traps serve as opportunities for reversal traders, whereas trend/momentum traders will suffer losses due to the change in direction.
1) v. to slip off a pedal, causing it to slam one in the shin, when one gets cracked with a pedal. 2) n. the tooth like scars resulting from being bear trapped. Origination from the bear trap pedals used in BMX – which surely cause these unusual scars. I had on across my stomach once!…ONCE
A signal which suggests that the rising trend of an index or stock has reversed but which proved to be false. Thus trap the bears that acted on the signal with losses. A bear trap is a form of whipsaw and relates to the spring.
The situation when a bear market reverses its trend, or the price breaks downward, and bearish investors assume the decline will continue and take out short positions. The price then reverses itself again, and a new up trend is formed with the consequential conclusion being that the bearish investors are trapped on the wrong side of the market and must close out their positions to make a potentially unlimited loss.