Trapped traders are a simple concept you may wish to incorporate into your trading strategy, due to its potential to offer higher reliability trade setups.
These are price action based setups in which traders suddenly find themselves trapped in an undesirable situation, either:
- Stuck in a losing position, desperate to get out; or
- Stopped out of a position that then moves back in their direction, leaving them desperate to get back in.
The key in both cases is that the price action has placed traders in a position where their normal human emotional response will compel them to make a trade. We can then increase our odds by trading in the same direction as this new surge of order flow.
There are numerous ways this can present itself on a chart. We’ll look at one of my favorites today, and follow up with other trapped trader patterns in future articles.
Today’s pattern is called a 3-swing retrace.
You might also hear it referred to as an ABC correction, or an ABCD correction. It could also be considered in some cases a bull or bear flag.
We’ll start by examining a 3-swing retrace in an uptrend.