In this week’s blog, we explore one of the most valuable lessons in trade management. It happens to the best of us. You’re in position to make a great profit (or so you think) but then everything goes sideways. Suddenly, you’re on the wrong side of things and unsure of what to do. Getting into or out of a trade at the wrong time can leave you in a vulnerable position as a trader. The term “Trapped Trader” is used to describe this position. Below, we outline how to use trade management to avoid this fallacy and also how to profit off of other trapped traders.
The term “trapped trader” is used to describe traders who have entered into or exited trades at a non-ideal time. Thus, leaving them out of an otherwise profitable trade. There are two ways to be considered “trapped”:
#1. Trapped in a losing position –
This is when the market has turned direction from where you thought it would go. Eventually, you will have to exit this position as determined by your stop-loss. In between the time you enter and get stopped out is the time you are considered trapped in your position. Because there is nothing to do but watch the trade play out in front of you.
How to profit off these traders: If you see a large increase in long positions, followed by a draw down, you know that those traders who are in the long position are now in a panic to sell. Their panic can be your in by either trading short if you expect it to go lower in price or long as the price hits a low and begins to increase.
#2. Trapped out of winning position –
This is when the market turns direction against you, but then quickly reverses after a stop-loss has taken place. Usually, some traders will try to chase the markets and achieve their original price goal that they were stopped out of. This position chasing leads them to enter the trade impulsively.
How to profit off these traders: As these traders get stopped out and price begins to increase again, they will enter back into the trade. Then, as price starts to pull up, you can buy long as these traders re-enter the market. These moves are harder to see without the use of an indicator and therefore can be tricky to profit off of.
Trading is risky, but by having a system in place, you can improve your odds. To determine trade suitability, we recommend you ask yourself these 4 questions before you enter into a trade:
- What are we doing and why?
- What trade setup did we take?
- Where do I plan to enter the trade?
- Where do I plan to exit?
Knowing these 4 things before trade entry can help to avoid becoming a trapped trader. This is not to say that you will not have scenarios where you do everything right and still end up on the wrong side of things. However, by avoiding an emotional response, you’re more likely to come out on top in the long run.