A New Market Model – The Market As A Self-Deception Mechanism – Part 2 of 2

“Will you walk into my parlor?” said the spider to the fly;
‘Tis the prettiest little parlor that ever you may spy.”
… Mary Howitt

Last week, we discussed a market model based upon the fact that the market is a mechanism that promotes self-deception. If you missed the article, read it first here: http://yourtradingcoach.com/trading-process-and-strategy/a-new-market-model-the-market-is-a-self-deception-mechanism-part-1-of-2/

The end result of the article was an understanding that the basis for trading in accordance with this model, is one of recognising deception in the market.

We trade with three main objectives:

  1. Be aware of the potential for self-deception, especially when faced with a “certainty”.
  2. Aim to maximise your profits through recognising when others are being deceived, and trading against their position.
  3. Aim to minimise your losses through recognising when you have been caught in a trap, allowing prompt action to exit before suffering catastrophic damage.

Self deception applies in all timeframes, at both a macro and micro level.

Let’s look at some chart examples though, from short timeframe Euro charts.

(1) Be aware of the potential for self-deception, especially when faced with a “certainty”.

“Do not bite at the bait of pleasure, till you know there is no hook beneath it.”

…Thomas Jefferson

Where do we find self-deception?

While it can occur anywhere on the chart, the obvious place to look are whenever you see a move on the charts that tempts you to jump in, which on further examination is:

  • Against an existing strong trend, with price not yet having broken your trend definition and shown price acceptance in the new direction.

  • Rallying right into an area of resistance, or declining right into an area of support.

  • Any price move which, upon examining the higher timeframe, will simply look to the higher timeframe participants as an opportunity to enter against your planned position. In particular, lower timeframe breakouts against higher timeframe orderflow.

(2) Aim to maximise your profits through recognising when others are being deceived, and trading against their position.

Having recognised potential deception, stand aside and wait. Failure of the “certain” move will provide an opportunity against the direction of deception.

Another example:

(3) Aim to minimise your losses through recognising when you have been caught in a trap, allowing prompt action to exit before suffering catastrophic damage.

Sometimes though, the trapper becomes trapped. Being alert for this situation, allows us to scratch a trade, ideally prior to price taking out our stops.

  1. Be aware of the potential for self-deception, especially when faced with a “certainty”.
  2. Aim to maximise your profits through recognising when others are being deceived, and trading against their position.
  3. Aim to minimise your losses through recognising when you have been caught in a trap, allowing prompt action to exit before suffering catastrophic damage.

These principles are not the only way to profit from market action. They’re just a way of implementing the deception model, allowing for greater awareness of market opportunity and risk than is available to the newbie who just chases the “certain” trades.

It’s not the way I personally view the markets (see YTC PAT), although it is closely related to the trapped trader concept that is an integral part of my trading.

If you like the concept, trial it. Note those times when your emotions are just busting to get you to take action… and examine the price action more closely… it could well be a trap. This different model for viewing price action may be just the change you need to take your trading to the next level.

Happy Trading,

Lance Beggs

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YourTradingCoach – Admin

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