A bear trap is a trading pattern characterized by an asset’s price falling temporarily before eventually rebounding. Bear traps require a group of traders to implement and are initiated by the group selling large quantities of the same asset at one time. This signals to other investors that the asset’s price is likely to decline, and they too begin to sell, resulting in an actual price drop. Once the price of the asset has fallen sufficiently, the group that initiated the procedure are able to repurchase the asset at a much lower price than they sold it for. After the market realizes the bearish signals are unfounded, the price of the asset rebounds and the original group may make a profit.
This process derives its name from the idea that ‘bearish’ investors will be quick to sell once they learn of large selloffs.