How often, after opening deals, based on the continuation of the trend, were they unprofitable? And in fact, in fact, you did everything right, because impeccably adhered to the main postulate of the technical analysis “trend is your friend”. But each time something went wrong and the intended direction was reversed.
In today’s lesson, we will analyze these situations and talk about pitfalls in financial markets. Contrary to popular belief, this will not be about some psychological traps, but about very real bull and bear traps, in which periodically “slow-moving” traders find themselves.
You will learn about the reasons for their appearance and what actions need to be taken so that if you get into the trap, you can free yourself with minimal losses. We will also consider a strategy to profit from this phenomenon.
Let’s start with the definition.
Trapsplaces are called in which, instead of the expected continuation of the directed price movement, it breaks down. A trap can be either a pin on a tick chart or a protracted consolidation. In the first case, it appears as a result of the hunting of large players for clusters of stops located behind the levels of support/resistance, trend lines. In the second case, a redistribution of positions occurs in a narrow price range: some market participants rely on the continuation of the trend and open positions according to the trend, while others take profit or open counter orders. Market maker (MM) is actively involved in this event, trying to maintain balance and fill more passengers. When everyone settles down comfortably and pulls up their feet,
Let’s look at a real example:
The uptrend on the pound dollar is clearly visible. At some point in time, the first bullish wave was completed – on the chart, this is clearly visible by the breakdown of the trend line and the intersection of the zero marks on the AO indicator. After a long correction, the bulls made several growth attempts. New buyers were involved in the market, who placed their stop losses under local low, other market participants considered that the trend was complete and started selling. Those who set their stops too close to the support level were taken out of the market. Those who considered the second breakdown to be true and sold after closing the hourly candle under support, after overcoming the resistance level at the price, were forced to fix the loss.
And then we see that the upward movement continued and the structure of the bullish wave almost entirely consists of traps, which sellers and buyers of the currency pair fell into with varying success.
After some time, the uptrend continued again, which was broken only after a 17-hour consolidation and the subsequent breakdown of buyers’ stops.
So how could you make money in all this mess?
If you noticed, then in the areas of consolidation almost always one of its borders has a flat side. This suggests that a large market participant holds the price with limit orders placed at a certain price. And when its volume is completely selected, the price shifts to a new balance zone. Transactions are best opened during subsequent testing of this zone. For example, in the figure below, this is a top-down retest, also known as trading from “mirror levels”.
There is also an experimental strategy in my arsenal based on the “meat indicator”, which is used to determine the mood of the crowd. We can say that this is a kind of exit gender for currency pairs.
Entrance to the market is carried out in several stages with the help of pending limit orders placed at clusters of crowd stops.
For example, a few days ago it was possible to determine with high accuracy the lower boundary of the price range and the most likely direction of movement on the GBP / USD currency pair.
For trading using this technique, positional trading is best suited, which provides for the installation of stops behind long-term support/resistance levels.
If the movement does not follow the scenario, then most often due to averaging and subsequent retest of the zone of accumulation of stops, we get a total positive result for several orders. In the most unfavorable outcome, a common stop will work. I note that this happens extremely rarely.
How to minimize your losses, if you still got into the trap?
Although I am not a supporter of locks, the best solution is to put the lock in an open position, wait for testing the support or resistance level, open the lock and set a stop on the first trade right after the level. If the level persists and a rollback begins, then this will allow you to display the total result for two orders in the zero areas.
Use traps for-profit and let profit come with you!