UK Accounting Glossary
A bear trap occurs when a declining market reverses direction, catching short-sellers off guard. In a bear trap short-sellers, who have continued selling in anticipation of a further drop in a now-bullish market, are eventually forced to buy back stock at a higher price to cover their positions. A bear trap can also be created by a temporary downturn in an otherwise bullish market, tricking short-sellers into stepping into the bear trap just before prices again begin rising. Obviously, short-sellers wish to avoid the bear trap. The bear trap primarily exists due to the difficult nature of market timing. If short sellers had a way of knowing with certainty that a bearish market had turned bullish, the bear trap could be easily sidestepped. Unfortunately, such market timing is difficult at best, leaving many short sellers at the mercy of the bear trap with each market swing.
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This glossary post was last updated: 4th February 2020.