We first visited the concept of trapped traders a couple of months ago, in this two part series of articles:
- Trapped Traders – Part 1 – http://yourtradingcoach.com/trading-process-and-strategy/trapped-traders-part-1/
- Trapped Traders – Part 2 – http://yourtradingcoach.com/trading-process-and-strategy/trapped-traders-part-2/
While there are other variations of the ‘trapped trader’ concept that we haven’t explored yet, I thought it would be good to revisit this simple concept. Often the most simple trading approaches are the best.
These trade triggers continue to be some of my favourites.
If it’s something you dismissed last time, I encourage you to have a closer look and see if you can find these patterns in your own markets and timeframes.
Here’s a few recent examples from the emini-Dow:
The above 1-min chart shows an example of an upthrust.
Price was trending downwards when it stalled and formed some sideways action. At the circle, price spikes up above the short-term resistance, reaching levels not seen for about 20 minutes. This will drag in some reversal/breakout traders, who enter long, but then get smashed into drawdown before the minute is out. As price breaks the low of the candle and the sideways range, these traders are forced to sell their position, adding to the bearish orderflow as price recommences the downward movement.
This next chart (above) is the exact opposite pattern – a spring.
Price is trending upwards before stalling. Rather than pulling back, price forms a sideway ledge, indicating a lack of commitment from the bears. Eventually though price tests the area below the ledge support.
Shorts would have triggered entry at this point, hoping to profit from the reversal.
You’ll notice in this example there is very little volume supporting the break-down, indicating lack of supply and a higher probability of a breakout failure. The downside of this, of course, is there is a smaller force adding to the bullish pressure when these traders rush for the exit. However, every bit of demand helps, and as price reverses on the next candle and breaks out above the ledge to resume the uptrend, our trapped shorts will exit, adding to the bullish demand of the breakout and trend traders entering long.
In the above example, we have a 3-swing retrace. It’s not a perfect pattern. Ideally I prefer to see a stronger resumption of the trend, quickly taking out the low between swings 2 and 3. However, we trade in the real world, not in the world of ‘text-book’ patterns.
Be on alert for these setups wherever you see three swings against a prevailing trend.
The third swing (second push up in the above example) will bring in the reversal traders. You can see the spike in volume at 02:08 AM (11:08 EST). On resuming the trend, these bulls will be forced to sell, adding to the bearish pressure of the trend continuation traders.
As in all three examples above, trapped trader patterns are best when used as a continuation pattern, resuming the prevailing trend. Check out your historical charts. You’ll find these patterns are quite common. Simple to identify and very effective. What more could you ask for?