I cannot get the trace tool to even function since upgrading to 10.1. As you will see form the attached image, I'm trying to trace a polyline into a polygon, but it doesn't trace; it just continues to draw the polygon.
I can't be sure what has happened from the image, so I'll just suggest one thing I've found when using the trace tool to create polygons that ends up looking a bit like your image. Instead of double clicking or hitting F2 to finish, switch back to the 2 line tool and click once using it, then double clicking or use F2 to finish the sketch. You might see if just clicking once while using the trace tool and then double clicking/hitting F2 works since that's easier. It doesn't happen all the time to me, but simply trying to finish a polygon with the trace tool seems to lose all the trace after the last click.