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Posted on 9 April 2011 | 3,349 views

Bear Market Traps Inside Market Crashes

A “Bear Trap,” which takes its name from the “Bear Market,” indicates an incorrect indication that the rising movement of an index or a stock has started a serious reversal – but it has not.

This kind of trap can often be seen when there is a bear market reversal, and short sellers are firmly convinced that the markets will begin a drop back into a waning pattern. In a bear trap, however, when the market actually keeps rising, any short sellers become “trapped.” They are then required to pay to cover their positions… and to do so at higher costs.

Falling into traps in bear markets is easy. Our fears and emotions are heightened. Big losses tend to be seen, especially in the current bear market, leading to “desperation” moves. Some investors get so scared, they don’t do anything.

Investors convince themselves that a stock makes sense because it’s cheap, making it a great value is known as a Value Trap. But sometimes “cheap” can mean “trouble.” Examine the fundamentals of a sector instead before deciding that something is a bargain.

The urge to recoup losses can lead some investors to make outsize bets on narrow stocks or within volatile sectors is known as a Risk Trap. Instead of taking big risks, experts suggest sticking to the basics: staying diversified and building returns steadily through compound interest and dividends.

Everyone’s looking for someone to blame for the losses, but don’t forget that nearly everyone is in the same boat no matter who is managing their money is known as a Scapegoat Trap.

Many investors are now too scared to move at all. They either are scared to sell off holdings to limit losses, or they’re too scared to get back in when there are signals that suggest it could be an opportunity is known as a Paralysis Trap. If you’ve hit a buy signal, you may find it helpful to research the fundamentals of your position. This may make it more comfortable for you to take a position and help you overcome your paralysis.

Wall Street likes to promise safety with certain products when investors get especially fearful, but there can be a downside is known as a Comfort Trap. Sometimes these products come in the form of big fees or they can limit your upside potential. Bear in mind that to get some return, there has to be some risk.

It’s tempting to react to each and every little turn the market takes, especially if you’ve got the television tuned to a financial news network all day long is known as a Chasing-the-News Trap. How can you avoid these reactions? By having a strategy and sticking to it. We use the 200-day moving average to decide when we’re in and out. While the day-to-day news can be interesting and helpful, the 200-day is the signal we rely on.

Remember that a bear market is a market situation in which the pertinent investment prices are falling, and there is a broad sense of doom and gloom that causes the market pessimism to become something of a self-fulfilling prophecy! As investors come to expect more and more losses in a bear market, and as selling continues, the negative expectations only increase.

However, a bear market is not the same thing as a correction, which is a shorter-termed trend that will generally last less than a couple of months. Remember that while corrections can be a nice time for an investor to discover a market entry point, actual bear markets cannot usually be expected to provide them. In addition, a bear trap can cause a short seller to become caught in a tough situation when working with a bear market, so caution is indicated.

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