Traps… My main focus to make money in trading
The market is volatile for a few days and I hope you are all making decent money out of it. Volatility increases the initial risk in the trades and it is our duty as traders to contain the risk as per our money management rules. If you hunt for traps during volatile sessions, there is a big chance of decreased risk and increased reward potential for a trade. In my trading, almost 70% of entries are based on traps. Traps help us to work a better entry using LTF than that of the LWP. Traps give us a good potential to take the trade into profits as it contains the order flow given by the stop triggering of the trapped traders.
There are two books that influenced my trading to a great extent and surprisingly, they are not books related to trading.
The Art of Warfare, by Sun Tzu, translated into English by Ames.
The 33 strategies of War, by Robert Greene.
Yes. These books are about warfare. I personally feel that there are a lot of similarities between fighting a war and trading financial instruments. War and trading need a strategy way before we make our hands dirty in it. They both need the skill to read our opponent psychology to frame our tactics to take maximum advantage of the situation. They both test the emotional weaknesses to the extreme level when in a fight or in a trade. If you want to be a professional trader, I recommend you to have a hard copy of these two books in your personal library.
Enough with the introduction. Let me phrase a few quotes from the book, The Art of Warfare, before starting the discussion about traps.
“If you know about your enemy and know yourself, you don’t need to bother about victory.
If you don’t know about your enemy, but you know yourself, for every victory, you will face a defeat. So you win 50% of your battles.
If you neither know about your enemy nor yourself, you are doomed to failure. “
This motivated me to learn reading candles. I started to focus on spirituality to know my self. Active management and trading traps are next to impossible if we don’t master these two.
“Not getting defeated lies in the hands of the general and to defeat the opponent is presented by the opponent itself. “
This helped me in building my risk management and money management rules.
“Hide in the caves of the earth when the enemy is trying to attack and attack the enemy like a thunderbolt from heaven when he is not prepared to defend from the top. The general who has the ability to use the powers of earth and heaven is going to win the battle. “
I used to hesitate in giving entries before and this quote motivated me to attack when the opportunity presents itself which is the core of my aggressive trading. I started respecting my practice sessions after reading this as a practice is the only thing that gives confidence in attacking.
These three quotes changed a lot of things in my trading. I never used to think about the traders taking the trade against me at my entry price before reading this book. In fact, I thought that this information is useless in my personal trading and it’s very hard to get as in trading, all the traders except me are my opponents and it is practically impossible to read everyone’s mind.
I have witnessed outstanding results on the first day of implementation of these in my trade plan. Trading used to be boring before and it now turned to be fun as I am trying to read other’s mind with the help of candlestick charts. Like everything in trading, it is not easy to master and it gets better and better with experience and practice. But you cannot learn it from a book or from some other static source of knowledge.
There are three steps I follow while hunting for traps.
The following points must be clear before looking for traps.
Future bias must be very clear, otherwise, you will end up taking traps against the high probable bias which is a disaster. As a thumb rule, I expect breakouts against my bias fail.
Identify the price levels or zones where you look for traps in advance. We don’t trade all the traps in a chart. A trap occurring in the setup area which we have identified using the six steps explained in trade school are the high probable ones. I personally use those traps occurring in the areas other than my setup zones to take decisions about trade management, to validate my bias etc.
You can only take traps if you understand the information carried by each and every candle. Don’t jump onto the traps without understanding the context in which it occurred.
Keep these three points at the back of your mind.
Now the next step is, categorize the traders(your opponents) who are trading in the timeframe you have chosen and give a clear description of when they initiate their trades. I am giving a few categories to give you an idea on how to do that. But there are many and it is your duty to think about them…
Pattern traders:-They initiate their traders when a classical candlestick pattern or a technical chart pattern appears on the chart.
Support and Resistance traders:- These traders take blind entries with limit orders when price approaches an obvious support or resistance levels. They also take breakout entries of support and resistance with a stop order.
Breakout traders:- Those who take entries on candle high/low breakouts or chart pattern breakouts with a stop order.
Strength and weakness traders:- These guys always take entries against weakness and in the direction of the strength.
Scalpers, Positional traders who want to fine-tune their entries with lower timeframes, Market makers, Trading robots etc. and this list will be huge. I don’t want to explain each and everything here as it kills your effort. It will get imprinted in your mind if you find them on your own.
You are almost done. Now that you know when other traders react, you can hunt for those traders in your category list who are getting trapped against your bias in your setup region. Look for traps at price levels which are very obvious for a naked eye like HOD, LOD, PDL, PDH, PDC, structural S/R etc. But remember, trades must be taken in the direction of future bias only.
So who according to you are trapped traders??
Those traders taking trades against your bias. They might be from the same timeframe or a different timeframe.
Who is the trapper??
You and the market are trappers. Sometimes, the trapper gets trapped and it is just a part of the game.
How to name the traps??
Simple.. If you think that bulls are trapped, it is a bull trap. If bears are trapped, it is a bear trap.
Don’t run in a treadmill of thinking each and every market movement as a trap. Understand the context and use your read of the market to name it as some trap.
Like other authors of trading books, even I can give you a few examples like Upthrust, Spring, CPB, Pattern failures etc. and tell you that these are traps. It is not going to help. I believe that charts are just a mere representation of trader’s decisions, ie. charts are the effect. Why focus on the effect when we can develop a skill of reading the cause and taking decisions before others??
If you train your eyes and mind to find these traps in a chart and combine them with the setups in the trade plan, you got something very powerful in your hand which shows opportunities that are not visible to others.
I will be writing more on traps in future articles with examples when I find time as it is a never-ending and equally important topic in trading. I think this information is enough for you to start your research on traps.
Before concluding this article, one more point I want to emphasize.
In trading, we are not manufacturing weapons like machine guns or swords to attack. We are weaving a spider nest with our limited knowledge of markets to trap others. We wait until someone gets trapped and then we initiate a trade against them without any hesitation. You gonna miss the opportunity if you don’t attack at the right time. You can only do that if you have full faith in the spider nest you have weaved. Understand the plan to the dot. Practice it. Plan the trade and trade the plan.
Rather naive questions, pls bear with me.
In this article you say:
1) Future bias must be very clear,
In the above 3 examples what was you future bias.
2)Identify the price levels or zones where you look for traps in advance.
Can you please elaborate a little about this? Would be better if you do it with the help of above 3 examples.
1) With the benefit of hindsight, the bias at the time of taking those trades was in the direction of the trend as I don’t see an HTF level in these charts to call for a CT bias.
2) The following article answers the second question.