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What is a Bull Trap?

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A bull trap is an inaccurate signal that a downtrend in a market or investment is over. When a stock has experienced a period of decline investors may sit on the sidelines waiting for the selling pressure to subside before buying in. Investors use a wide variety of signals to detect that a stock has hit its bottom and is on the rebound. For example, crossing above a 50-day moving price average is commonly touted as a bullish indicator.
According to the efficient market hypothesis, stocks can follow any pattern of ups and downs and there is no magic indicator that a downtrend is over. Bull traps occur when investors initiate positions believing they see a sign a downtrend is over only to see further price declines.
Overview: Bull Trap
Type
Behavioral Finance
Definition
An inaccurate signal that a downtrend in a market or investment is over.
Related Concepts
Efficient Market Hypothesis
Behavioral Finance
Next: Value Trap

Behavioral Finance

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