Thursday, October 6, 2011
Traps I - Bars in the wrong place
Many traders lose money because they do not recognize traps in time and once they are in, they will hold hoping for a miracle. With some experience and pain, any trader will eventually learn to recognize traps and avoid them.
There are many kinds of traps, but they have some common features. The first is that the bar taken alone probably looks great. For example, b1 today was a reversal bar at the ema with a very strong close. A new trader can be forgiven for assuming that its breakout will lead to a strong trend. However, a reversal bar needs to dip beyond a prior swing to be valid -- if not, its just a trading range bar.
b14 is a similar trap. Although it did give a decent scalp move, being the first attempt to reverse a strong move from the LOD is unlikely to succeed and strong traders added on at the ema instead of shorting.
b44 seemed to be a possible bull reversal bar at the ema but its placed after a long string of bear bars. What is more, b36 was a failed H2 and should lead to two legs down, so b44 is unlikely to be a successful trade.
b65 comes after a possible major reversal (MR) and is unlikely to turn around without at least 2 attempts down. b69 on the other hand would be an OK trade if it was a small bar at the top of the flag since its a possible failure after a second attempt up.