Bull Trap

In trading, a “bull trap” refers to a situation in which long-sellers, or “bulls”, are forced to close their positions at a loss.

A bull trap occurs when a rate’s upward trend reaches its limit and begin to fall. Investors who took long positions shortly before the rate reversal sell their positions quickly to avoid major losses. The closing of long positions fuels the downward trend, causing rates to fall further and faster. Long-sellers who are slow in closing their positions can incur heavy losses.

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

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

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