Definition Definition

What Is Bear Trap? Understanding the Bear Trap with Practical Example

What Is Bear Trap?

Bear Trap is a term that indicates trading situations when a certain stock's price is going downward for a long period of time but suddenly reflects a misleading upward sloping that results in a trap for the short seller. This type of false indication is basically a trap where traders tend to get fooled and fall for it. It is the predicament facing short-sellers when a bear market reverses its trend and becomes bullish.

Understanding the Bear Trap

Shorting or short selling is commonly done with a bear trap by traders. Shorting is the method of selling a property at a high cost and purchasing it at a lower price to benefit from the deal. Shorting stocks via a broker on leverage is one approach in bear trap trading.

The trick is to predict the market to decline while selling the shares at the present price and repurchase them at a lower price to return to the broker. In a bear trap, practicing short selling raises your danger by a factor of ten. The assets continue to sell in anticipation of further declines in price, and short-sellers then are forced to cover at higher prices and that is the trap.

When the price of the stock climbs instead of declining, you wind up paying more for it and repurchasing to keep your margin. As a result, when one of these traps happens, a bear trader's risk is multiplied by several times that of a bull trader.


For example, Tesla's (TSLA) stock is perhaps the most well-known "story stock" of the previous generation. The company has a fervent following of fans and adversaries, both of whom have staked enormous sums of money in it. 

Conventional manufactures like General Motors (GM) and Ford (F), which have market capitalizations worth $58 billion and $35 billion respectively, vs Tesla's $630 billion. As a result, as Tesla grew from a niche interest player to the market leader it is now, shorts saw every adverse trigger as an opportunity to increase its position.

Use of the Term in Sentences

  • The term bear trap is used to indicate a false market trend reversal pattern that can occur at any time. 
  • Bear trap deceives traders by encouraging them to establish short sell positions which eventually lose value.


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