How to profit from ‘trapped traders’

  

What is a trapped trader?

A trapped trader is someone who bought/sold into a situation where they thought they knew where price was going. Price then moves against them to the point where they have no choice but to exit the position, adding more momentum to the move.

Imagine this scenario…

1. A trader sees a breakout from a resistance line and goes long thinking price will continue upwards.
2. Price goes up a little bit and then starts moving against the traders position
3. Now this is a losing position, and it can only hold out a little longer before becoming completely hopeless
4. Eventually there is no choice but to sell the position
5. The act of selling the position adds even more momentum to the fall in price.

Now picture that you were watching the whole situation happen. What would you do? When would you enter? You cannot sell at the highest price point because then you would be setting yourself up for the same disaster the trapped trader did. You must let them become ‘trapped’ into their bad trade before you can profit from them

You must wait for the trader to become ‘trapped’ and then enter the trade in the opposite direction at the precise point in time where trapped traders decide that they cannot withstand any more losses and the trade has become hopeless. You will then profit from a violent move in the other direction

What does this situation look like on a chart?

Just like this…

1. Price broke through the trendline
2. The trendline also happened to be around a big round number of 133
3. Price made a huge charge upwards (almost 100 pips from the breakout)
4. It then lost its bullish steam
5. It began to turn downwards and go against the traders
6. At some point it became too much to ‘bear’ (haha.. but seriously) for them and they had to sell their positions adding to the selling pressure pushing price down.

Just look at how violently price was pushed down after the trapped traders began selling their positions. It went for almost 200 pips into profit if you would have sold at the bottom of the bar that broke the trendline. Price did also bounce back upwards after the fast drop, but you wouldn’t have watched 200 pips of profit dry up would you?

Remember…

• Patience is what will let you profit from these trapped traders, you can’t buy into the hype of the breakout. You must let them trap themselves first.
• Once you have profited from them, do not let your profit disappear under any circumstances. Take part of the position off or move your stop tighter
• Look for the right price action and wait for the bar to close before entering a stop order to open the position

Look at these further examples of trapped traders…