Trapped Traders

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Picture this. After your evaluation of a trading chart, you have laid out a trade plan for a particular market state and a

trading position.

You are not a trader that listens to outside sources nor are influenced by

actions by other traders as seen on the chart that goes against your plan.

As a matter of fact, you sometimes laugh when you see chart action that

shows some traders are taking positions that you consider a suckers

bet.

That is the wrong reaction. Instead, you should be silently thanking them

for their errors because it is their errors that can quickly power your

trade to profit.

Have you ever stood in the ocean a few feet from the shore and felt the water draw back into the vastness

behind you? Soon, you are standing there in water about half of what was

there before. Suddenly, the water rushes in behind you and tosses you

forward to the shore.

That is like those traders that have to exit positions because they are on the wrong side of the market. Their action

can push your trading position to profits.

It’s like the trader who sees the bigger move starting to occur and not

wanting to be trapped out of the market, use a market order to get in the trade. If enough contracts are

being exchanged, late buyers can also slam price in your direction.

I want to show you a recent example of what happens when traders get

stuck on the wrong side of the market.

This chart shows a small range within a range and what appears to be a

momentum break out to the downside. Traders were drawn in by

the break of the support of the smaller range and of the bigger range.

In 13 seconds, price recovers back inside the range and a long trade is

taken.

8 seconds later with the long being fueled by shorts (trapped in the wrong

direction) exiting their positions through buying, price flies to the scale out target for half the overall position.

This graphic is one minute after the move on the first chart I showed. You can see price recovered strongly and

even broke above what was potentially resistance.

Around these areas, you will have break out traders as well as those

looking to fade the breaks of potential support and resistance.

Depending on your read of the market and the resulting move of the market, these traders will also add fuel to the

move in your direction.

Just shy of the three minute mark from the break below support, you can see

that decent profits are about to be taken on the long trade on the final

portion of the position.

Like that rush of water when the waves crash to the shore, trapped

traders can be quite cause quite an aggressive move in the market.

Trapped in the wrong direction – Fear of losing money

Trapped out of a move – Fear of missing the move

That fear and the actions that result can make for extremely pain free

trades.

The key….as usual…is the ability to read price action and resulting

structure. There are almost always clues to where you should be leaning

and your job, is to ensure you are looking at the most probable move.

Trading around ranges can be tricky however know that there will be

traders who want to play the break of every potential support and resistance

zone.

Quite often, the break fails and these traders are trapped on the wrong side

with only one play….exit through buying/selling their trading position.

The action these traders take can result in a more robust move in the

opposite direction causing side-liners to jump in when they see big

red/green candles.

Like the trade shown on these charts, being positioned already in the

probable move can have you hitting price targets rather quickly.

You can be well rewarded if you add the reality of trapped traders to your toolbox. One of the simplest ways I

know is if a breakout occurs:

1. Watch how strong people buy/sell into the move. 2. When price enters back into the range, consider trading the move back inside. 3. Allow those trapped to exit, fuel the move, and scalp out a some profits.

It is extremely important to know when you are wrong.

Going back to our second chart, let me

show a few stop areas to consider….

The stop at #1 is an obvious area that if breached, the short would probably continue and that makes this a decent

exit.

The #2 stop is in the area of the smaller range and the auto stop I used

just happened to find itself in this region. If that area breached, I could be facing an extension of the smaller

range or a complete failure of the upside move.

Either one gives me enough reason to get out of the trade. If my trade

selection is right, I fully expect price to continue strongly to the upside and

not find itself pausing in these types of areas.

It takes practice. It takes time. I believe that as a trader, opening yourself to the actual realities…the actual price moves, moves around structure, and

structure itself…is a tremendous course of study.