Trapped Traders

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Introduction

So what exactly is a Trapped Trader? A Trapped Trader is a trader who gets into a position only to see it go against him fairly quickly. We KNOW that this trader will become more and more concerned as his position goes against him until he is forced to liquidate his position for a loss. Now, there are TWO critical points here: #1 Our main task is to find where this is going to occur where a trader is likely to get trapped #2 We are looking for as many traders as possible to get into this position; where they are FORCED to exit as the market goes against them. Point #1 is what the rest of this eBook is about we will be providing example after example of different ways traders get trapped,

This eBook focuses on ONE thing only TRAPPED TRADERS! You may have an idea of what we are referring to with this term and youre probably thinking along the right lines. But even if youre not, fear not, as we are going to start right at the very beginning. Now, what we refer to as Trapped Traders is not a price-pattern, strategy, method or anything like that. We consider Trapped Traders to be a way of THINKING; a way to view the markets. In this eBook we will be seeing many common, and some not so common, pricepatterns that occur in the markets; ALL of these will be viewed from our perspective of Trapped Traders.

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HOW they become trapped and what unfolds as they are forced to exit losing positions. We will expand upon point #2 now for those who may be unfamiliar with what happens when many traders are forced to exit positions. Lets take the scenario where a market has just rallied. A rally is the result of more buyers than sellers in the market. As fewer traders are willing to sell, and more traders are willing to buy, the price increases as traders start offering to pay higher and higher prices. Now, the market could be rallying as most of the traders are entering a trade buying, with the hope of selling later at an even higher price or the market could be rallying as most of the traders are already short, think the market is going to continue higher, and must BUY to cover their Short positions before

their losses potentially become larger than they already are. The market rally will generally be a combination of these two scenarios playing out. Although it is implied, the exact same scenario weve described is applicable to a falling market where traders are caught long and must SELL to cover increasing losses. Now, lets get to the good stuff and start learning how to figure-out where the majority of traders are going to be positioned on the wrong side of the market and are forced to pay-up and trade their way out of it fuelling a move which we will ultimately be a part of in the right direction. Many of the examples we present to you carry a great deal of overlap by this we mean that we will be getting you to observe one scenario on a chart, but with your own knowledge

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(particularly if you have read the REAL Traders Course), you will see other scenarios taking place at the same time. For example, while we may be referring to a simple break-out pattern to explain something, you will see this break-out pattern as traders anticipating the break of a Psychological Number. This is partly intentional and partly inevitable for two reasons: firstly, we wanted to focus your attention on ONE pattern that was occurring so as to keep your attention on what effect Trapped Traders were having; and secondly, its NOT a coincidence that you see ONE pattern that could be interpreted as VARIOUS patterns. If youve already read the REAL Traders Course then you will see some familiar concepts here but this time from the mindset of looking for Trapped Traders!

Onwards.

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Observations: Psychological Numbers in this example it is the 1145.00 and 1140.00 level.

A1 Traders jump in trying to short the market as price breaks previous low hoping for a break-down of the 1140.00 level. All selling is fully absorbed by traders looking to fade the 1140.00 level. B1 The traders who shorted into the 1140.00 level are now in offside positions and are forced to liquidate (by buying back what they sold) as price continues to rise. A2 Similar scenario to A1: traders jumping in, hoping for a momentum-move down, as price breaks previous low and psychological number. The market falls a little but all selling is again absorbed and the move rapidly loses momentum.

B2 Again, similar to B1, the traders who shorted into 1140.00 (and previous low) and past it are now starting to feel the pain of their position going against them buying the market to cover their positions causing a rally up to the 1145.00 psychological number. A3 There are a couple of bounces off the 1145.00 level before it breaks and the market moves higher. There is no momentum followthrough as the buying is absorbed by sellers B3 the market falls back again and the traders who hoped for a move higher are now starting to liquidate by selling as the market continues to fall fuelling the move lower.

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Observations: Psychological Numbers in this example it is the 1135.00 level; also, the Absorption concept from the REAL Trading Course.

A Market takes-out recent low and falls steadily towards the 1135.00 level traders selling are hoping for a continued move down B - but, we can see in the boxed region that all selling is totally absorbed [over a 10minute period] at the 1135.00 level. C The traders who sold into the cluster of buy-limit-orders sitting around the 1135.00 level are now starting to see the market go against them. As expected, they start to feel the pain of the losing position and start to buy themselves out of their situations taking a loss and moving the market higher as they do.

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Observations: Support & Resistance.

A (Nothing to observe here until B is formed). B The market finds resistance at a level that was previously support (A) now there is potential for other traders to start looking at this level for being a potential trade area: approaching it from below traders would be looking to short it; approaching it from above traders would be looking to long it. C We can observe that there were attempts to short the market here as price approached the previous S/R level. There was a little reaction as price stalled D - before continuing higher. The momentum-move higher is fuelled by [short] trapped traders liquidating and buyers looking for a continuation which they get.

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A Traders are selling at the 1162.50 level for over 30-minutes; we can see from the long shadows on the bars (or, candles) of the chart that the sellers keep coming in. B The market falls, but not very far, before we see buyers coming in at B. The market then rallies a little C before coming back down to match the low made at B. The traders who shorted at A are hoping for a momentum-move down. However, the price drifts up as there is a lack of sellers to take the market lower. D Here, at point D, is crunch-time for the traders who sold at A; if the market does not turn downwards here they are going to start to panic as their positions start to going into the red

E - and sure enough, panic ensues, and a momentum move is triggered by the traders who sold at A getting forced out and new buyers jumping in long as price makes a new high [note: it is also a new high for the day since session Open].

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A Resistance found at A as price battles to get any higher and falls off B until some buyers come in at B. Price then ranges C - before another attempt is made at going higher at C. This fails and buyers come in again at D.1. Price rallies to D.2 before falling back to D.3 and then rallying to D.4. It can be observed here that price is now making higher highs and higher lows as it approaches the previous resistance level at A. Reading further into this tells us that the higher lows are caused by buyers willing to pay a higher price than before each time price comes back down. The higher highs tell us that each time price rallies there are fewer sellers there waiting to sell into the rally

this is our heads-up! All the traders who have shorted at A, C, D.2 and D.4 could potentially find themselves on the wrong side of the market E - and sure enough, price explodes above what has been a resistance area F - buyers storm in to buy the breakout, a cluster of stoploss-orders are most likely triggered and, of course, the trapped traders [who sold below the resistance area] are panicking to get out of their shorts (in more ways than one!).

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Observations: Dynamic Support & Resistance.

A (Nothing to observe here until B is formed). B A higher low is formed (A being the lower low here). C A second higher low is formed. Now, this is where we will start to observe traders looking to go long as price comes back down to make a third higher low. D Sure enough, price comes down, buyers come in, and price rallies up again a third higher low is made. Remember, we are on the look-out for traders getting trapped in positions that go against them.

E Price comes down again to make a potential fourth higher low. There is a little bounce but the trendline breaks-down and gives us the heads-up! The chances are most of the traders will have their stoplosses (either actually placed in the market or at least in their heads) below the low of A which at this point is the low of the day. 1 Although the previous higher lows have broken-down a new higher low is formed with respect to A. 2 Again, a second higher low is made, this time at 2. Now, its RED ALERT!

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3 We have traders who went long at A, B, C, D and E and even more traders who are long from 1 and 2 now either at break-even or in a losing position. The low made at A gives-way 4 - and price drops like a rock: the longs panic and fall over themselves trying to get out; and new sellers come in looking for a momentum-move down which they get!

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Observations: Dynamic Support & Resistance and Psychological Number.

A Price breaks the 1140.00 level but fails to follow-through on momentum B before dropping down to B. Buyers come in here and price starts another rally. C As price heads toward the high made at A traders come in and sell it before it is reached. D The market drops rapidly until buyers come in at D before price reaches the low made at B. Now, after the high and low made at A and B respectively, a lower high (C) and a higher low (D) are made. Now we have a battle.

50 percent of the traders think the market is going up and the other 50 percent think it is going down. One group of traders will be correct and the other group will be wrong or as we know them, TRAPPED! E The market makes a minor lower high and then very minor higher low before F - exploding out above the levels made at A, C and E. Again, the huge momentum-move is fuelled by trapped traders getting out and new buyers jumping in.

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Observations: Pressure-Play and Psychological Number.

A Sellers come in prior to price reaching the 1090.00 level. B Sellers come in again but this time at a higher level. C Yet more sellers, again at a higher level. We are seeing that the sellers are having less and less effect each time price rallies. We have now observed 3 lots of selling if price continues up, there should be a decent number of traders on the wrong side of the market. D Sure enough, price battles with the 1090.00 level for over 30-minutes E - before blasting through it as sellers at A, B, C and D are forced to liquidate.

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Observations: Pressure-Play and Psychological Number.

This example is almost identical to the previous one. These patterns occur over and over. A Sellers come in prior to price reaching the 1135.00 level. B Sellers come in again. C Yet more sellers this time at a higher level. D A fourth lot of sellers this time exactly on the 1135.00 level. E The 1135.00 level finally gives-way as the [trapped] sellers at A, B, C and D panic and are forced out.

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Observations: Support & Resistance and Initial Range.

A Traders sell at the 1137.50 level; this level is the low of the previous trading days Initial Range. B Buyers come in at B. C Sellers come in again at the 1137.50 level. D Buyers come in again where they came in previously at B. We now have two lots of traders thinking the market is going up; and two lots of traders thinking the market is going down. Either the long or shorts will win. E 1137.50 level breaks and the traders who sold at A and C are forced out. This break-out

is also a new high for the day.

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Observations: Fakey.

A Price breaks down through the recent low. Traders short hoping for a further move down but buyers absorb all the selling. B The traders who shorted at A are squeezed out at the market goes against them.

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Observations: Absorption and Psychological Number.

A ALL buying into the 1145.00 level is absorbed. B Any attempt to go higher has been absorbed by sellers and so those traders who buy into the 1145.00 level now start to see the market go against them. They are trapped and subsequently forced out.

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A (Nothing to observe here until B is formed). B A higher low is made. C Sellers come in at the 1145.00 level. D The low at D is higher than the low at A and matches the low at B. Signs of buying strength in the market. E Price rallies but sellers take it down before it reaches the high made at C. F Price only drops a little before traders start buying again. We now have 3 higher [or equal] lows (B, D and F) and a lower high (E). The situation is now in place where we have a group of

traders who will be wrong and a group of traders who will be right. The market drifts up after making the low at F. G The sellers at C and E feel pain and start to liquidate causing the market to move higher.

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A Point A marks the second higher high. A rough trendline can be drawn to anticipate another [potential] higher high that traders may start buying at. B Sure enough, traders buy again and a third higher low is made at B. C Price rallies strongly, breaks the 1165.00 level, but fails to move higher. D The market makes another attempt but ultimately fails. The traders who bought at C and D are now starting to question their long positions another higher low is there only hope E - this doesnt happen, the trendline breaks, the market drops hard and fast further fuelled by those who bought at B

being forced out of their longs as well.

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Conclusion

traders, whichever market they operate in, do the same things over and over and over. Learning to identify the same patterns over and over is what will push your trading to new levels. However, understanding how and why each of the patterns form is what it takes reach superstar trader status. We hope this ebook has gone some way to help you understand the how and why of the markets and we wish you the very best in your trading endeavours.

This eBook was about practical, real-life examples. In each example, the observations made were specific to a particular concept we wanted to highlight. However, within every example there are numerous observations that could have been made. Trading at a professional level is not about having a database of strategies to use on an array of different markets. It is about understanding who is operating in the market and how they are operating. Once you learn this - every market becomes the same to you. You will see the same patterns in almost every market. Every market consists of traders; and

Keep it REAL.

The REAL Market Traders

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Feedback

If you have any questions, comments or feedback please contact us via the Contact page on our website: www.REALMarketTrading.com

Or email us directly at: [email protected]

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Disclaimer

This communication has been prepared solely for information and data purposes and is not intended as an Invitation or Inducement with respect to the purchase or sale of any financial instrument. This communication should not be regarded as a substitute for the exercise by the recipient of its own judgement. Any reliance placed on the communication is at the readers risk. Information and opinions have been obtained from sources believed to be reliable but no representation is made to their accuracy. 2010 REAL Market Trading. No copy can be taken without prior written permission. Charts Trading Technologies International Inc. All rights reserved worldwide.

Trapped Traders

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