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Bull Trap

A bull trap occurs when a market, stock, or other financial asset initially shows signs of rising after a decline, leading investors to believe that a bullish trend is forming. However, this rise is short-lived, and the price reverses direction, trapping those who bought in anticipation of a sustained upward movement. Bull traps often occur in volatile markets and can result in significant losses for investors who enter long positions based on the false signal.

Example

A stock that has been declining may suddenly rally, prompting investors to buy in, believing the downward trend is over. If the price quickly falls again, those investors are caught in a bull trap, potentially incurring losses.

Key points

• A bull trap is a false signal that a market or asset is reversing its downward trend.

• It leads investors to buy in prematurely, only to face a price reversal.

• Common in volatile markets and can result in significant losses.

Quick Answers to Curious Questions

Investors can avoid bull traps by waiting for confirmation of a trend reversal, such as sustained price increases and higher trading volumes, before entering a position.

A common sign is a brief rally in price that lacks strong volume or other supporting indicators, followed by a quick reversal.

They can lead to significant losses if investors mistakenly believe a new upward trend has begun and buy in just before the price reverses.