Bear Trap

A false breakdown to the downside that lures short sellers in before reversing sharply higher, trapping the newly entered shorts in losing positions.

A bear trap is the mirror image of a bull trap. A security breaks below a key support level — drawing in short sellers who believe the downtrend is accelerating — but then quickly recovers above the support level. Short sellers who entered on the breakdown are now trapped with losses, and as they cover (buy back shares to close their shorts) they contribute fuel to the recovery rally.

Bear traps are common near market bottoms when bearish sentiment is at its peak and short interest is elevated. A brief, decisive break below a widely watched support level may trigger a rush of new short positions and stop-loss selling from longs — creating the very liquidity that allows large buyers to accumulate positions at low prices before the market reverses.

Short sellers protect against bear traps using stop-loss orders placed above the entry price, capping the loss on a failed trade. The bear trap concept is also important for investors managing long positions: a brief, high-volume break of support that snaps back quickly is sometimes a "shakeout" designed (or naturally occurring) to flush weak holders before a larger move higher.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.