Trapped Traders: How to Identify, Exploit, and Maximize Profits

A trapped trader is a term used to describe a situation where a trader finds themselves in a difficult position in the market. It happens when they make a trade, but the price moves against them, causing them to incur losses or become “trapped” in their trade. This can occur for various reasons, such as entering a trade at the wrong time or misinterpreting market signals.

Trapped traders are those who enter a trade and find themselves unable to exit without taking a loss. This can happen for many reasons, such as unexpected news events or poor risk management, but the result is the same: significant price changes as traders scramble to get out.

But what if I told you that being aware of trapped traders can actually be an advantage in trading? By identifying these levels on a chart, you can use them as support or resistance levels and potentially profit from the market movements caused by other traders liquidating their positions.

Price Action Trading – Trapped Trader Strategy

It does not have to be difficult to use the price action dynamics of trapped traders as part of a trading strategy. This is a simple strategy that uses common technical analysis to not only have a zone to trade in, but also to enter and exit your trades.

Identify Trapped Traders

Look for support and resistance levels based on prior price history, trendlines, or moving averages.

Spot price patterns that suggest trapped traders, such as failed breakouts, false breakdowns, or prolonged consolidations.

Entry Rules – Long (reverse for shorts)

Wait for a breakout above the candle that indicates trapped participants.

Enter a long trade if the price breaks above resistance, triggering trapped short sellers to cover their positions.

Confirmation and Validation

Confirm the breakout with additional technical indicators, such as volume spikes, bullish or bearish candlestick patterns, or momentum indicators.

Validate the breakout by ensuring that the price continues to move in the anticipated direction, supported by increasing volume.

Stop-loss and Take-profit

Set a stop-loss order slightly beyond the breakout point to limit losses if the trade goes against expectations.

Determine take-profit levels based on nearby support or resistance levels or by utilizing trailing stop orders to capture potential profits as the price moves favorably.

Trade Management

Monitor the trade closely, adjusting the stop-loss level to protect profits as the price moves in the desired direction.

Consider scaling out of the position partially to secure profits and minimize risk.

If the price fails to continue in the anticipated direction, exit the trade promptly to limit losses.

Risk Management

Calculate position sizing based on the desired risk-reward ratio and your risk tolerance.

Limit the maximum risk per trade to a predetermined percentage of your trading capital.

Analysis and Evaluation

Regularly review and analyze trade performance, making necessary adjustments to the strategy based on real-time market conditions.

Backtest the strategy on historical data to assess its effectiveness and refine its parameters.

Defining Trapped Traders

Trapped traders refers to the concept of market participants who find themselves  unable to exit their trades without taking bigger losses.   These traders often experience a sense of being “trapped” as they are unable to escape their positions without incurring losses.

Trapped traders can include both retail traders and institutional players, and they can be found in various financial markets.

The identification of trapped traders is based on analyzing price action patterns, such as failed breakouts, engulfing bars, or exhaustion candles, which provide insights into the psychology and behavior of market participants.

Significance of Trapped Traders in the Market

The significance of trapped traders in the market lies in their influence on price and potential trading opportunities.

Here are some key points highlighting their significance:

Using Trapped Traders in Trading

By learning how to use the concept of trapped traders in your trading strategy, you can gain a deeper understanding of market dynamics and potentially increase your profitability.
Trapped traders can be used as support or resistance levels, providing you with key levels to watch for potential breakouts or reversals. Sellers who are trapped in their positions may be forced to liquidate their position if price action moves against them, which can cause a sharp move in the opposite direction.

To effectively incorporate trapped traders into your trading strategy, it’s important to understand price action dynamics and look for clues on the chart that indicate where buyers or sellers may become trapped.

For example, a bullish candle with a long wick may signify that sellers were unable to push price lower and subsequently got trapped in their short positions. Paying close attention to these patterns and using them to inform your trading decisions can help you stay ahead of the curve and capitalize on market movements.

Types of Bull and Bear Traps

A bull trap is a false signal that suggests an upward price movement, but instead, the price falls after reaching a certain point. Traders who enter long positions during a bull trap may get trapped when the market reverses, causing them to incur losses.

To avoid falling into a bull trap, it’s crucial to use technical analysis tools such as support and resistance levels or trend lines to confirm whether the bullish trend is genuinely strong.

On the other hand, a bear trap is a false signal that indicates a downward price movement, but instead, prices rise after reaching a particular point. Traders who enter short positions during a bear trap may get trapped when the market turns bullish and experiences an upward trend.

Therefore, traders should always be cautious when entering trades during volatile markets where sudden changes in trends are expected. It’s essential for traders to use proper risk management strategies such as stop-loss orders and position sizing to minimize their losses if they fall victim to these traps.

Avoiding Becoming A Trapped Trader

To avoid falling into losing trades and increase profitability,  understand price action dynamics and look for patterns that indicate where buyers or sellers may become trapped.

Here are some tips on how to avoid getting trapped in the market:

Avoid chasing breakouts: Breakouts can often be fake outs, and traders who enter a trade during a breakout can easily get trapped when the market reverses. Instead of trying to catch breakouts, focus on buying dips and selling rips.

Be aware of emotional responses: Emotional traders are easily swayed by short-term momentum and can become trapped in trades when they don’t have a clear plan or strategy.

Make informed trading decisions: Before entering a trade, make sure you have a solid understanding of the context and potential risks involved. Don’t enter just because everyone else is doing it.

Use stop-loss orders: Stop-loss orders can help limit losses if the trade goes against you, preventing you from becoming a trapped trader.

By following these guidelines, you can help minimize your risk of getting caught in losing trades due to being a trapped trader. Remember to always stay focused on your strategy, manage your emotions, and take calculated risks based on sound analysis rather than impulsive decisions.

Failure Tests

Some will call these false breakouts but what is usually happening is the market is probing levels above certain areas for some sort of market action. These probes are designed to grab stops above key levels as well as entice buyers or sellers to jump on the breakout. They are also used to gauge interest at prices they are testing.

These are called failure tests or using the term the real inventor of this type of trading (Wyckoff) described it, upthrusts.

This is a daily chart and I have extended a weekly resistance line (since 2013) over to the displayed chart position.

Price is consolidating around the zone and this can often indicate a potential for a move in the same direction. I personally look for strong pushes and then price to consolidate at the highs of the move. Often times this can result in a further move up.

Traders see the large green candle, the consolidation, probes, and finally a strong push up. Remember, that failure candle was actually a strong green candle at one point.

Traders pile into the long side and that high of the reversal candle runs right into the extreme high of the zone!

On the same daily candle, price falls back into the consolidation zone and those long are trapped on the wrong side of the market.

They must exit.

The next day, the red candle tells the story of all those traders that ended up being trapped, exiting and new shorts entering the market.

Trapped Pullback Traders

Markets move in waves with impulsive and corrective moves. A very popular trading method is trading the corrective move and entering a trade in the direction of the trend once the corrective move signals completion.

The issue is that many traders are impatient and don’t want to risk not being in the move.

So they enter trades too early at the first sign of completion. When stopped out, they still don’t want to miss the move so they re-enter.

Complex pullbacks are a little tricky in that they can be hiding inside a higher time frame structure. What may appear to be a simple pullback will actually be a two-legged (complex) pullback on a lower time frame.

Again, this is how the markets move and nobody invented this concept. If you are a trader and you have to exit a losing position, when would you do it?

Before this complex pullback, we had what appeared to be simple pullbacks on this time frame. Remember, simple pullbacks can be complex pullbacks on smaller time frames. Price advanced off the first leg but when this complex completed, the price went on an extended up move.

The first black line indicates the first leg of this pullback and the pin bar looks like it could indicate a resumption of the up trend. Traders enter and place their stop below the candle.

If your trading approach is only with complex corrections, you would not be in this trade.

Price advances then turns around and turns the longs into traders who are trapped short and takes out stops. This could also entice short players who will end up being trapped if/when price turns back in the direction of the trend.

That large green candle is a combination of patient traders, shorts exiting their trades, and first leg traders re-entering.

Frequently Asked Questions

What does it mean to be a trapped trader?

A trapped trader refers to a market participant who is caught in a losing position, unable to exit without incurring losses.

How can one effectively trade with the concept of trapped traders in mind?

Trading trapped traders involves identifying their positions, using price patterns or indicators, and strategically entering trades to capitalize on their potential actions.

What are the common reasons behind the lack of profitability among most traders?

Most traders struggle to be profitable due to lack of proper risk management, emotional decision-making, inadequate trading strategies, and insufficient market knowledge.

Conclusion

If you want to make profitable trades in the market, the Trapped Trader strategy is a must-have tool. By identifying the emotions and behaviors of other traders, you can position yourself to take advantage of their mistakes and capitalize on market movements. So, keep an eye out for trapped traders the next time you trade and use this strategy to your advantage.

Updated: May 2023
Published: Oct 2015