Traps and Failures are the strongest signal in technical analysis. So I think we need a thread on this subject.
Why are traps such a strong signal?
Markets are by design suffering from schizophrenia and bipolar disorder. At any moment the number of buyers equals the number of sellers. So which way will the market continue? Nobody can tell, unless one side has been beaten up and demoralized. For a short period the seasoned trader can benefit from the loser's covering their positions, which gives an extra-drive to price, even in absence of a dominating trend. This could be a short squeeze. There are two populations of traders that are the ideal victims for traps
(1) amateur breakout traders
(2) early countertraders who try to catch a top or bottom and rush to the exits, when the trend resumes
Both types of trades create excellent opportunities. (1) comprises the classical bull or bear traps and famous setups such as the 2B setup from Victor Sperandeo or the Turtle Soup setup from Linda Raschke. (2) is a trade difficult to enter, as price has already moved far, but they are the most rewarding trades ever.
So that is what a trader can do: If there is a major move, just follow the trend. If price is going nowhere, the name of the game is to trap out other traders. :biggrin:
This morning, I have been trapped sveral times, but avoided the worst my respecting my stops. Here are my trades (see below).
:idea:
Trade idea
My trade idea basically came from the 30 min chart (see below). At the open price for 6E was sitting on last Thursday's high. I expected significant support and a breakout to the upside. In case of a failure to breakout to the upside, I expected a brealout to the downside. Also I expected volatility to rise after the open.
Trade 1 - Breakout Failure
Long at 1.3246 above the inside bar at 8:50 (14:50). This was a second entry. Three bars later a doji reversal high volume churn bar formed below the floor pivot PP. This proved me wrong and I exited with a small profit of 2 pips. Those, who did not exit in time were trapped. See long red candle.
Trade 2 - Breakout Failure
When understading the trap I entered short at 1,3242 hoping for a short breakout from the opening range. The breakout did not occur, but again a doji showed up, which also was a high volume churn bar. Exit with a profit of 5 pips.
Trade 3 - Stopped out
With respect to the high volume churn bar, and still having my original trade idea in mind, I entered long at 1.3238, when I realized that the bears were too weak. Put my stop just 2 ticks below the churn bar. Result: I was stopped out with a loss of 8 pips at 1.3230. I was not the only one who was trapped, but there were others, as the long green candle shows.
Trade 4 - Second half stopped out
Entered long at 1.3236 after I realized the trap. First profit target at 1.3246 was met, second half of the position was stopped out at breakeven, average profit 5 pips.
Trade 5 - Second half stopped out
Price made a higher low, so I entered long just above the reversal bar at 1.3238. At that point my original trade idea had not been invalidated. First profit target was met at 1.3250, but then price reversed below the floor pivot, and again my second half was stopped out at breakeven. Average profit 6 pips.
:stop: I guess my trade idea has been invalidated now. So I stop trading and review my mistakes.
Mistake 1
Ignoring the volume associated with the opening range from 8:00 AM to 9:00 AM ET. The volume only was 13k contracts. This the lowest opening range volume since July 12, when the volume of the first hour was about 8k contracts. July 12 also was a Monday and price went nowhere during the whole day. Why do I expect a breakout, if the opening range volume is the lowest of the last four weeks?
Mistake 2
Underestimated the floor pivot PP. For three of my trades, the floor pivot would have been an ideal exit. If I had exited the first half position just below the floor pivot, this would have made me another 8 pips. So actually my exits were more based on …