Bull Trap

Bull traps take place when an asset’s price rises and starts to generate false bullish signals for traders.

They are known as traps because the initial rally causes more bullish traders to join in, at which point it reverses and drops back down to below the position of the initial rally.

Those who are long in these situations will incur losses and receive margin calls if they refuse to exit their positions. Made worse by the use of leverage.

Bull traps are common in downward trending markets as traders are always attempting to time the bottom and benefit from a reversal in the price.

Downtrending markets tend to generate many bull traps as brief rallies convince traders that a reversal may be underway only to continue falling.

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