Most often bear traps occur in a strongly uptrend. A bear is the one who always has a bearish mindset in the market. They think that the market is not going to go up, it will fall/reverse.
When bears think that a trend reversal in an uptrend is imminent, they go short thinking that the market will reverse. If that downtrend never occurs or after a small correction bulls jump back into the market to take the stock price to a new high, then many short sellers will be forced to cover their position.
These trapped short sellers or bears cover their position by buying back the stock at a higher price. This subsequent increase in buying activity due to trapped bears can initiate further upside. This price reversal is called a bear trap.
A Bear trap occurs due to a false indication of a negative reversal.
When market participants incorrectly identify the decline in price in an uptrend, the risk of getting caught in a bear trap increases.
Bear trap can occur in all types of asset markets, including equities, futures, bonds, and currencies. It causes bearish investors to lose money.
The opposite of a bear trap is a bull trap.
