A bubble happens when asset prices rapidly increase to levels significantly higher than their fair or intrinsic value. Many of the market wizards specialize in bubble trading, perhaps most notably Colm O'Shea, who trained under George Soros. O'Shea considered himself to be a fundamental trader but would still trade against his own fundamental thesis if he believed the market to be wrong. The idea is to prefer becoming rich rather than correct.

Bubble riding is a momentum-style trade where eyes are kept closely on the exits, and stop losses (or precise exit plans) are in place. It would also be typical to keep moving up stop locations, such as with an automatic or manual trailing stop. What makes bubble-trading distinct from a normal momentum trade is that there is a particular lack of faith in a legitimate reason for the move, and so an inevitable crash is continually expected.

A major strategic element of riding a bubble, as many of the market wizards would say, is that you cannot try and time a perfect top. Instead, there would need to be a compromise to perfectionism where it starts to drop. This requires closing below prior account highs. 

One of the market wizards, William O’Neill, tells the parable of a man who was trapping turkeys. He had 12 turkeys in a trap that he could only close once without scaring all other turkeys away. But one walked out. He was angry at himself that he didn’t close then, so he decided to close it if one walked back in. Then two more walked out. He decided he would then close it if he had 11 turkeys again. Three more walked out. Eventually he had no turkeys. (Schwager, 2006, p. 226-7)

Any active investor or trader can immediately identify with this frustrating scenario.

As reality eventually sets in and the market realizes that the asset—or index—is not worth what it was being traded for, prices can drop rapidly, leading to a sudden and large loss for many investors. They might assume that they could have exited whenever they wanted to, but then when the time comes the exits are too crowded. A frequent reminder (of how real this phenomenon is) can often be seen with giant premarket moves when economic numbers are announced outside the range of expectations.

What is often referenced as an iconic moment in history for bubbles is the dot-com bubble of the late 1990s. Any internet-based stocks seemed invincible. Investors were correct that the internet was a revolutionary new technology that would change the world, but they carelessly extended that notion to any company with a dot-com next to its name, with full abandon for the fundamentals. They were piling leverage into companies like Pets.com, despite how any investigative fundamental analysis would have revealed its net cash flow to be doomed. 

Bubbles can occur in any type of asset class, including stocks, bonds, commodities, real estate, crypto, and famously even tulips. And their subsequent collapses can have significant implications for the overall economy.