Updated on March 3, 2023
Bull trap is defined as a false market signal which ‘traps’ a trader or investor. A Bull Trap is essentially a situation where the price of a security rises above a certain level, attracting traders or investors. They enter at that price point, considering it to be a breakout level. However, the upward price rise is shortlived and thus it ‘traps’ these traders/investors who bought the shares considering them to be in bull territory. They thus, get stuck or ‘trapped’ because the price then declines at a rapid pace or they are forced to exit at a loss.
Important points to note about a Bull Trap
A bull trap can be avoided keeping these points in mind:
a. Bull traps are visible in downward markets when there is a sudden rise in prices. This is considered as a possible start of an uptrend by traders, who take this as a price reversal signal. Their entry at this point soon turns out to be a trap as prices soon reverse.
b. Bull traps can also happen in a flat market or at the end of an uptrend.
Not jumping with a buy action at the first sign of reversal may be a good way to prevent getting into a Bull Trap.