By Sam Seiden, Online Trading Academy Instructor
Have you ever received a letter in the mail saying you are a finalist for a large financial prize? Typically, all you are required to do is call an 800 number, give them your credit card number, and you then get a chance to be one of three people who may win a multi-million dollar prize. If this sounds too good to be true, it almost always is. Truth is, there is no prize and there are no finalists, it's all an illusion. If you end up calling the 800 number and giving them your credit card information, you have likely just bought something and don't even know it; you just fell for the "trap." The hope of the trap-setter is that the illusion of the prize is so great that you will not realize the financial trap you are about to fall for. Companies in many industries make fortunes because they are good at setting all kinds of traps for prospective buyers. They are good at it for two reasons. First, because they are good at setting the traps, which means they are masters of disguising risk as opportunity. Second, they are very good at identifying the weakest prey.
Have you ever watched one of the late night infomercials touting an automated buy and sell signal trading and investing system that generates huge returns every month? Testimonial after testimonial telling you how great it is and you can have it for a small investment of $1,900? Again, the goal of the infomercial is to create such a strong illusion of success that you will fall for the trap and buy the system. After all, if you see a testimonial of someone making $5,000 in a month, why wouldn't you pay the $1,900 for the system? Truth is, if they really created such a great automated trading system, do you think they would be selling it to you? Of course not, but the masses will always fall for these traps.
Trading is really no different. In the Online Trading Academy Extended Learning Track (XLT) program, we set traps all the time. While it sounds awful to talk about it this way, the truth is that traders who don't understand how markets really work fall for the traps set by those who do. In other words, those of us who spend the time and attain the education necessary for consistent profits get paid by those who don't. In trading, there are no 800 numbers or infomercials, it's a much quicker transfer of accounts. Let me better explain with some student trades from the Extended Learning Track (XLT) Futures program.
Above is a chart of the S&P Futures. An XLT Futures student identified the supply level above and to the left and set a trap. She laid a sell short order at 914 because the chart suggested at that level, supply greatly exceeded demand. She used our rule-based analysis to come to this conclusion. A couple days later and right before her short entry, price broke out of the 905 area and a strong and quick rally ensued. This rally took price up to the supply level of 914 – 917. A short-term trader who bought the breakout early could have profited from that trade but anyone who bought after the strong rally was underway and into that objective supply level was in trouble. These two mistakes are a lethal combination for any trader. This novice buyer who bought from the XLT student at supply believed that at 914, the S&P was a value and could move higher from the 914 area. Why wouldn't they believe that? You have a strong breakout, price was moving fast, nice green candles, and so on. The reality is that this buyer fell for the trap set by the XLT student. In this case, the student that knew how to really value a market got paid from the one who didn't.
This is a chart from a live XLT session where we identified a demand (support) level. That demand level is strong demand because of the explosive move up. We simply create a demand zone with the two black lines and carry that level forward. We want to make sure that we are there and ready to buy when price revisits that level in the future. Now, notice the red line on the chart. This line connects the two pivot lows above our demand zone and creates what most would consider a demand level at that red line. Let's move to the next chart to see how we handled the first pullback in price to the demand level. There was no way to get the demand level and the entry on one chart as the level was created a while back and would have scrunched the chart too much.
In our XLT session January 15th, price finally declined back into our predetermined demand zone created many days before. We focused on the red line as well because that created a strong trap for the novice trader. Here is how it works: as price was declining towards our demand zone (black lines), it reached the red line, which were those two pivot lows from a while back. Most traders are going to buy or get bullish at that red line because of those pivot lows, but not us. This sets up a common trap we love in XLT. If and when price trades below the red line, those who were bullish and bought, get very bearish and sell as they think support is not holding. What they don't realize is that they are selling right into our predetermined demand zone which is exactly what we want - the trap is set. As soon as the masses sell at our demand level, price moves higher and typically moves very quickly as you have caught the masses on the wrong side of the market. Those who fell for the trap simply transferred some of their account into our Boston XLT student's account.
One of the most important reasons to focus on high probability turning points in any market is to be able to limit your risk properly. We all have losing trades from time to time, which is why it is so important to enter markets close to your protective stops.
If you can't recognize a market trap clearly on a chart, chances are you are still the prey, so be careful...
- Sam Seiden
sseiden@tradingacademy.com
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