The cheetah and the gazelle…the crocodile and the wildebeest…the polar bear and the seal…the professional trader and the novice trader…what do these four relationships have in common? One is the hunter and the other is the hunted. Polar bears are white just like the icy snowy areas of the world they live in. Seals spend much of their time in water under a sheet of ice but have to come up for air at some point. When they come up for air, it is typically through a hole in that sheet of ice. Each breath however is potentially a life or death action because often, there is a polar bear waiting at that hole in the ice for his or her dinner, the Seal. A seal has choices as there is always more than one hole to choose from but they better chose wisely for if they don’t, the hole they chose will be a “trap” set by the polar bear and that will be the last breath the seal takes. Wildebeests live on land but have to find water to drink in order to survive. They too have choices as to which bodies of water to drink from. One lake or river is clean, cool water void of any danger. The other may very well have a crocodile just below the surface, waiting for the wildebeest to come drink. One is opportunity to drink, the other is a trap that leads to a quick death for the wildebeest and a nice hearty meal for the croc. No, this is not some National Geographic article and believe it or not, I am a big animal lover.
When it comes to trading and investing, the hunter and hunted relationship is no different than in the wild only the end result is not life or death. Make no mistake about it, there is a winner and a loser, nothing in between. There are many invitations to buy into a market. Some are opportunities that lead to low risk and high reward buying or selling opportunities that end up being very profitable trades. Others are traps that lead to losses for the hunted and profits for the hunter. One of the most favorite and high probability trades we like to take in the Futures live trading room (Extended Learning Track, XLT) is the Bull Trap or Bear Trap. For today’s piece, lets take a look at a major Bull Trap that we recently identified in the Mastermind Community at Online Trading Academy.
What is a Bull Trap?
Bulls, by definition, always look for signs the market is going up regardless of whether those signs are actually there. A bull trap occurs when traders think the price of an asset will stop its decline and start going up when, in fact, it will continue to decline. The “bull” is “trapped” and we as agnostic investors, who doesn’t care what direction the market is going because we know how to make money either way, can turn a quick profit by going short and trading against them.
A Bull Trap Opportunity
The opportunity was to short the S&P into a supply level, a major supply level that was developed back in 2000 (lower chart, S&P Daily). This is a price level where Institutions were willing sellers, where supply exceeded willing demand. How do we know this? Our strategy told us so. In simple terms, price could not stay at this level and had to decline away. Again, it declines because supply exceeds demand at that level. Based on a very strict set of rules, we wrap two lines around that level and carry that level forward because we want to remember where supply exceeds demand because that is where price is likely to turn lower in the future when it reaches that level.
OTA Mastermind Community
Supply/Demand Grid 4/11/13 S&P Futures 4/11/13
S&P Daily Chart Sep. 2000
This is a Bull Trap shorting opportunity for the following reason. Notice the breakout and strong rally on the upper chart which took price right into our predetermined supply level, where institutions were selling, setting up a perfect Bull Trap Short. Traders are taught that when there is a breakout and price moves higher in strong fashion, its time to buy. Once in a great while this may work out BUT, when there is a fresh supply level just above, this bullish thinking is a TRAP. What we were betting on with this shorting opportunity is that when price traded into that level, most people would become bullish and buy right into that fresh supply level. If this happened, we would be the willing low risk and high reward seller, just like the institutions.
The two key factors that made this work are knowing how everyone is trained to “think” the markets and knowing how to identify the picture that represents where institutions are buying and selling. Most are trained to buy on new highs, during breakouts, and when price is moving higher fast, thats how retail traders and investors think. I am trained to do the opposite. When prices are at retail (supply) levels, I want to sell to the buyer who is trained to buy at retail levels which is exactly how you make money buying and selling anything. I am certainly no smarter than anyone. I was trained on the institution side of the business, not brainwashed to do this backwards like a retail traders and investor.
If you’re going to compete in the game of trading, make sure you have an edge or you will lose your money to someone who does. This game is a transfer of accounts from those who fall for professional “traps,” into the accounts of those who set the “traps.” It’s the old hunter and the hunted. I do apologize if I have offended anyone with what may seem like harsh analogies but the truth is, I meant to send a strong message because the average person loses money trading and that’s not ok with me. They lose because they don’t have the mental edge the professional does. Learn to spot the difference between traps and opportunities.
Lastly, the turn in price in the S&P into our predetermined supply level was the high of this year. If you exited longs or entered shorts from that level, great. If you missed it, no worries. There are now more fresh supply levels above current price.
Hope this was helpful, have a good day.
Sam Seiden – firstname.lastname@example.org