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Trading and Investment Terms

Bull Trap

A bull trap occurs when traders take a long position and then have price reverse and move lower very sharply.

 

The long-positioned trader is trapped and this pattern often follows a very similar rhythm of luring traders into “obvious” long trades, followed by a sudden move against the traders.

 

A bull trap is an occurrence that happens during an uptrend. The price of an asset goes up until it reaches a resistance level. Here, it takes the typical break expected by all traders, and then, later on, it breaks past the resistance level.

 

The pattern is very tricky in that it might give “confirmation” of breaking past the resistance level. This makes any traders watching the price behavior to believe that the bull rally is proceeding, so they execute buy traders.

 

In trading, a ‘Bull Trap’ is considered a rally in price that creates a false momentum signal to go long because the downtrend looks like it is over and reversing back to an uptrend in price 

But it is a false signal and the market returns to a downtrend trapping longs who then need to sell to get out at a loss. 

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