Bear Trap

In trading, a “bear trap” refers to a situation in which short-sellers, or “bears”, are forced to close their positions at a loss.

Bear traps occur when downward trends in rates reach their limits and rates begin to climb. Investors who took short positions shortly before the rate reversal are forced to sell their positions quickly to avoid losing money. These sales cause rates to climb further, resulting in heavy losses for investors who sell their short positions late in the game.

The opposite of a bear trap is a bull trap, in which long-sellers, or “bulls”, are forced to sell their positions as rates fall.

More on this topic:
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Daniel Dreier is editor and personal finance expert at moneyland.ch.

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