The Bull Trap Strikes Again

Online Trading Academy Article of the Week

by Sam Seiden, Online Trading Academy

I know I keep writing articles on the Bull Trap but I can’t help it, they happen so often.

The other night I was playing in a hockey game, the score was 2 – 2 late in the game. I got a nice pass at full speed, skated around a couple guys, and I was in all alone on the goalie, one on one. As I made my move on him, I quickly dropped my left shoulder to get ready to shoot for the left corner of the net and win the game. The only thing is, I didn’t shoot the puck. That whole maneuver was to get the goalie and everyone else to believe I was so he would slide over to that side which is exactly what he did. As he fell for my fake (trap) and slid over to that side, I simply brought the puck over to the other side and scored into basically an open net and we won. The other night, the Chicago Blackhawks played their rival Detroit Red Wings. That game was also tied and went to a shoot–out to decide the winner. Johnny Towes, the Hawks captain was the first shooter for the Hawks. To my surprise, he skated in and did the exact same move, made the Red Wings goalie look silly, and scored with ease. He made the goalie think he was doing one thing while he was actually taking the opposite action.

When it comes to trading and investing, the shooter and goalie relationship is no different. 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 opportunities that end up being very profitable trades. Others are traps that lead to losses for the buyer and profits for the seller. One of the most favorite and high probability trades we like to take in the Futures Extended Learning Track (XLT, our live trading rooms) is the Bull Trap or Bear Trap. For today’s piece, let’s take a look at a classic Bull Trap that happened last week that we identified on the Mastermind Supply/Demand Grid.

The opportunity was to short the S&P into a supply level. The specific strategy is the Bull Trap as you can see on the chart below. Notice the two supply levels on the chart on the left, the yellow shaded areas and origin of supply zone lines (S&P 60 minute chart). This is a price level where willing supply exceeds willing demand. How do we know this? Simple, price could not stay at this level and had to decline away along with some other Odds Enhancers. Again, it declines because supply exceeds demand at that level. We wrap two lines around that level and carry them forward because we want to remember where supply exceeds demand because that is where price is likely to stop rallying and turn lower in the future when it reaches that level. Another word for supply is “retail prices”.

Click to enlarge

This is a Bull Trap shorting opportunity for the following reason. Notice the black circled areas on the chart. Those are pivot highs for those respective days/sessions. Most novice/retail traders see these are key levels, the assumption is that when price breaks above those highs in the future, it is a very bullish sign and time to buy.

A bit later, the breakout happens (red circled area) and a rush of buying came into the market as expected. However, that simply brought price up to solid supply from our MC grid which is where the smart money (banks/institutions) is selling. Price then begins to decline and ends up falling fast because retail traders were caught on the wrong side of the market at the worst time, a Bull Trap.

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 can identify “traps”. It’s the shooter and the goalie. The shooter doesn’t always win of course. Some goalies give you extra room on one side to get you to shoot there and by the time you shoot, they have that side all covered. Novice traders lose because they don’t have the edge the professional does and they don’t even know it. Learn to spot the difference between traps and opportunities BEFORE you put your hard earned money at risk in the market.

My fake was all setup before the goal was scored. The goal, though it all happened in less than three seconds, was all planned and very calculated, just like the Bull Trap. To me, hockey is no different than trading. Its competition at its finest and I love competition.

Hope this was helpful, have a good day.