In Part 1 of this article, I explained that there are three major core disciplines behind the traps we exploit every day in the financial markets.
As you may remember, they are:
- Breakout Trading
- Retracement Trading (or Pullbacks)
- Level Trading
And we discussed a little bit about how to take advantage of level traders but we didn’t really get into the details.
So, in Part 2 of this article (and the video above), I want to show you
two of my favorite strategies to trade off a level.
The first example I consider is that of trading off a triple bottom, and the second is a “Stop Hunt,” which is a strategy that big banks often use against retail traders.
Learn To Profit From These Trapping Mechanisms!
Trading Off A Triple Bottom
So, let’s first consider the details of trading off a triple bottom.
Just like before we want a level that’s been touch several times. So, in this case, it’s touched twice and price is now coming in for a third time. As price comes into the level, traders are going to look for some type of reaction off that level because they’ve done that historical analysis and hopefully they believe that it’s going to bounce off that level and give them the opportunity to take a trade.
So, it does indeed bounce and you get one candle that goes in the direction of the move that they believe will go to the other side of the range or higher. So we get one, two candles in the direction of the move. The point is that it’s the early stage of that move, because if you think about it, at some point the trader is going to have to come in and commit some capital. They can’t wait until prices are up here because they’ve missed the move.
So they’re going to have to come in on these first one, two, three candles. It’s not really any more than that….. It just depends on how it reacts…. Sometimes you can get a big engulfing candle at the level and that will get a lot more traders in in one go.
“JUST LIKE A MOUSE GETS TEMPTED BY CHEESE AND GETS TRAPPED, TRADERS GET TEMPED BY PRICE ACTION AT THE HARD RIGHT EDGE”
So, I refer to this occurrence as entry cheese, just like a mouse right gets tempted in by some cheese and then boom, gets trapped! Traders get tempted in by price action at the Hard Right Edge (HRE).
So, this is what we talked about the other day in the other video where traders don’t pay attention to what’s coming in the future. What happens is they get a super focused in the here and now. And because we know that they are either breakout, retracements, or level traders, it’s easy for us to deconstruct their trading strategies and see where they are in the chart.
Click Here To Protect Yourself
From These Mistakes!
So, price comes into the level, starts to bounce off, the hard right edge is creating this illusion, and so is the entry cheese. And then, traders behaviour is very typical from that point on, because what will happen is as price bounces off the level, what happens is that they’ll put a TP profit order
usually just in front of the range. And then they’ll place a stop loss just below the level itself.
So, if you were to be able to have a look at the orders, what you’d see is like a peppering all into that level.
And the more the levels touch the more peppering will occur. And that’s why I said that you need to really have a minimum of two touches every time you look at these setups. The more the merrier because the first touch into that level, not so many people took that trade.
Click Here To Begin Your Trial For
My Inner Circle Program
But as the level actually progresses and you get two, three, four touches etc. more eyeballs on it and that means more people are going to take the trade because it’s more obvious and as a consequence of that if more people are taking trades then there’s going to be more stop losses accumulating above or below these levels.
So the trader goes in…. (and at this point I don’t want you to do anything …. I just want you to be an observer of this so you see that traders are taking the trades) But now, what we want to do is just sit back and watch as price goes against them.
Now it may not happen. It may follow through and never turns into a trade but we just sit back and just relax and just let it play out. But if it does happen then we want to take advantage of that.
Since price comes into the level; bounces off it; two candles they believe it’s going to follow through. Then, we get a negative candle against those traders. Now, what we want is we want the level to clear because we don’t want this to be a stop hunt. And I’m going to show you how to trade a stop hunt in a moment. But this is this we don’t want to happen….we want it to follow through.
Now, how do we know if it’s followed through? What we need a two candle setup, with the open high low close beyond the level. No intersection of the level. We want it to clear the level like that and at that point we’re in the position where a trade can be taken.
Learn To Profit From These Trapping Mechanisms!
We just need some type of pull back into that level or it can be shy of a level. It makes no difference really. But, if it pulls back into the level, these traders who are trapped you can be fairly certain what they’ll do when price comes into here. They’ll start to bail out or break even.
And if they still in the trade if they never got stopped out below that level they’ll exit manually as price comes back in. Now, if they were a buyer off that level believing that’s going to head up, then as it comes into that level on a pullback they must sell to do that.
So, if it comes back after you get the two candles set up, comes back into the level you know there’s going to be supply there because those traders are going to bail out or break even creating supply.
It’s forced supply so buying and selling is usually just described as that or supply and demand is just described as that. It’s never described as forced and a lot of it is forced through taking profit and definitely through taking stop losses.
“BUYERS REALIZE THEY’RE IN TROUBLE AS
PRICE GOES AGAINST THEM”
<So, these buyers realize they’re in trouble as price goes against them. It comes back and they’ll barely break even and that creates supply. You’re also going to get break pull back traders, who are trading off the underside of that level; And if these traders did get stopped out then that’s more supply anyway. It’s just been triggered automatically.
Click Here To Protect Yourself
From These Mistakes
So, as price breaks down we get two open high low closes beyond the level. It pulls back and we get one candle in the direction of the move that we want to go down. As it closes the second candle opens and breaks the low of that first candle and we go short and put our stop loss above the trap. And then go for a minimum of two times risk. So, if you risk fifty pips you’re going to go for a hundred pips in profit. If you risk for a 100 you want to go for two hundred. And the reason we need these two candles to clear the level is so that we don’t get stop hunted.
You may have come across a break pullback set up before. It’s not the same thing because a break pull back basically just says sell as price breaks that prior level. The problem with that is there’s no trapping element; there’s nobody trapped…. So when price comes back into that level we know there’s going to be people who sell in there because they went long, buying off the level.
So the difference, the subtle difference is there’s no trapping at all that occurs just in here so when it pulls back, it’s just trading off the level and you’re hoping people will sell and that’s not that’s not really that wise. So we always want people to be in trouble whenever we take the trade.
“WE ALWAYS WANT OUR OPPONENTS TO BE
LOSING AND TO BE WEAK”
We always want our opponents to be losing and to be weak, because no matter how you dice it, if you went along at the top of this candle and prices down in here you’re losing the worst amount of everybody in that situation. But, maybe you didn’t buy the absolute high. Maybe you bought half way down or you not losing as much, but you still losing.
Click Here To Begin Your Trial For
My Inner Circle Program
What if you bought in the second candle open? Again not as bad, but still pretty bad. And then anywhere on this first candle doesn’t really matter where people bought in this entire structure . . . the bottom line, is they’re losing when price is down in here or in here. And the only difference was was that they didn’t WAIT!
Pathetically simple but that’s it… that’s all that happens. They acted in a reactive manner at the hard right edge. They had ….they believed that what was historically had happened they believed that it was going to occur again in the future long enough at least for them to make some money. Otherwise, why would they take some risk in the first place or you wouldn’t do it.
So they go in … we do nothing right….. We do nothing at all. We’re just observing at this point and then we just watch as price starts to squeeze them right and turn the screws and then we’ve got an advantage over this group of traders. And any situation where I’m going to risk some of my capital, I want this in play . . . people losing money obviously to varying degrees but definitely losing it’s an unarguable point. You can’t argue that point and psychologically losing at the same time.
But not only that, there’s an order flow advantage to this situation as well. We understand that people are going to bail out and that’s going to create supply. And we understand that people are going to trade that as a break pull back anyway and that’s going to create supply/ We understand we’re going in so that’s going to create supply. So that’s the first example , that’s a trap break pull back and I hope you get to take advantage of this in the markets.
Learn To Profit From These Trapping Mechanisms!
The Stop Hunt Trade
Now let’s take a look the second set up which is a stop hunt. Loads of people talk about it. Not many people understand it. It’s like a bit of a conspiracy in the financial markets. Does it occur or does it not occur? How do you take advantage of it? Can you see it on a chart. The answer is yes you can, and I’m going to show you how to do it right now.
So, what is a stop hunt first and foremost? It’s not a conspiracy. It’s more that it just has to work this way… The big banks and institutions let’s just say a bank; one bank. It’s easier to to get your head around it. A bank needs to transact and when they transact, they’re transacting in huge quantities.
But the problem is there might be a liquidity issue with that transaction, meaning there’s not enough people to tell you the side of the trade so what that creates then is a problem for them because they’re going to get hammered on, costs sometimes referred to as slippage.
And that simply can’t happen when you’re trading with huge sums of money. So, how do they get around this very real problem? Well the stop hunt is how they do it and let me explain.
Click Here To Protect Yourself
From These Stop Hunts
So, you’ve got your level of support that’s being touched several times. And remember I was saying earlier about the density of the stop loss orders will build up the more levels touch. So, there might be fewer on the second touch and even fewer people took the original move. So that’s basically the reason why there’s less orders because less people took the move originally.
Now, as the level becomes more obvious and clear the more people are going to trade it and more people are going to place their orders and that’s very obvious. It’s a very obvious thing and people believe that the more levels touched the stronger it gets. I’m sure you’ve heard that before, right?
“PEOPLE BELIEVE THAT THE MORE LEVELS
TOUCHED THE STRONGER IT GETS”
But really the more levels touch, the more obvious your moves become. And the banks know this. So as price bounces off the level – the entry cheese – traders go in and they place the stop losses below the leve. As soon as it do that it then goes down through the level right.
So. let’s imagine this is two candles that are broken down through the level.
Now what just occurred there? Well first of all if you’re a big bank and you’re going to you want to take this trade as well . . . You want to be a buyer of this ; buy, buy low; sell; high. It’s no different for the bank but the problem is if everyone’s buying there’s not going to be enough sell orders.
So, as price goes down to the level that’s forced selling. So these stop loss orders that build up at the level are being triggered. Now if they’ve been triggered the bank can get off some of its inventory. It can start buying into the selling that forced selling through price dropping and triggering those stop loss orders. It’s going to also going to seduce some people in. And so this is order flow; understanding the order flow of the level…
The people who didn’t place stops there, 5hose people will realize that the market’s gone as it breaks down to the level and they’ll start exiting just manually. So, that creates more selling.
It is buy orders. And in order to have lot of buying, a lot of selling has to occur. So, we’ve got to lots of selling going off. But guess what we’ve got now occurring as price breaks down to the level? Who’s likely to do some selling now? Breakout traders!
Click Here To Begin Your Trial For
My Inner Circle Program
Breakout traders will trade the break of a level of support and resistance especially one that’s built up and being very obvious and clear. They’ll think that a pop from that level is going to be like stronger than a normal one touch level because of the fact that loads of people were trading it.
So, breakout traders is pile in. Now imagine then that the next candle is actually a positive candle and imagine that it comes back up to the level. What might occur next? Well, if there’s a negative candle, maybe an engulfing candle or something like that, as it touches the level the retracement trader is now going to go short.
So we’ve got not only forced selling, you’ve got people who bought in here believing it would follow through or exiting manually if they didn’t get caught with the stop loss, you’ve got breakout traders doing more selling, then as it pulls back into that level, retracement traders go short believing the market’s going to follow through.
What’s that doing? That’s seducing more selling and obviously this can actually can be a little bit more elaborate. It can break the low even of that prior move. And what’s that going to serve to do? More breakout traders of that structure.
So, if it breaks down below that we’ve got breakout traders trading the breakout of that low. So if you end up getting a close strongly back inside the level then you want to go long and place your stop below stop hunt itself and make sure you go for a minimum of two to one. But do so knowing that you’re riding on the coattails of something. In this case, we’re going to call this a bank; something massive that just doing a load of buying
So you want to be aware that you just took a really small trade. So, all the buy orders that it couldn’t get off in the first bid of selling it ended up getting it all done by the time that people were forced to sell; by the time that people were seduced and induced in, it managed to get all its buying done. But, optically it looked as if all of this was heading down and that’s the trick.
That’s the trap! People believe because of these patterns that that’s going to occur and then they take the trades. They believe it looks like an opportunity. But it’s actually a massive mistake.
So again if you get a close back into the level you want to take a buy; place your stop below the stop hunt and then go for a minimum of two times risk. And if you’ve got a range take your profit on the other side of that range. That could be a three to one; a four to one etc.
And if you’d like to learn even more and get a real edge in the financial markets and learn how to profit with even more advanced strategies, then come and join me in my Inner Circle. Just click the button below to get started.
Click Here To Begin Your Trial For
My Inner Circle Program
Have a question or comment about this article? Want to share a thought or story about trading traps? Please post your thoughts below. We’d love to hear what you think!