What is a bull trap?
The expression 'bull trap' describes a pattern of asset-price movements that wrongly convinces some investors to believe a rally is under way thus the time is right to buy. Such movements can apply to a single asset, such as shares in a particular, company, or to a sector or index as a whole.
Where have you heard about bull traps?
As an investor, you will be aware of the dangers of misreading price signals and buying securities at the wrong time. Investment guides may refer to bull traps, as may the financial media. Your financial adviser may warn you of the dangers of bull traps.
What you need to know about bull traps...
A potential bull trap is created when a decline in the value of a security or group of securities appears to have been reversed. Bullish investors, keen to get in early on a price recovery, buy the asset concerned in the hope that they are doing so at a bargain price and that a profit will be made as the security heads upwards. But the signal was false, and the underlying trend remains downwards. At this point, the bull trap is sprung and the investor is holding a security whose value is declining.