Price Action: Traps of Market-Makers

How many times have you thought that the trend had changed, and then the price abruptly reversed? How many times have you followed the movement, which turned out to be false?

It’s not your fault. And not of your strategy. The thing is in traps that market makers make for you to hit your stops, or to activate pending orders. Today we will talk about how to recognize these traps, their types, and most importantly - how can we make money on it.

Traps – are places where the market is trying to make you believe in a false movement, that it actually exists and will continue.

Finding traps

Let’s take a look at the chart below. Tell me where you see here an opportunity to get profit? Typically, traders first of all pay attention to the area with the most traffic, but it’s not quite right. Still, these movements do not happen often and they are not always easy to catch. In fact, forex traders should pay attention to the areas marked with green circles.

Traps are often characterized by a false level breakthrough. Typically, in these places, stop-loss and stop orders of other traders are collected. This happens for getting liquidity (opening or closing of major positions), and, of course, for earning money.

The breakthrough level is usually noticeable, at least about the size of a few candles, but not necessarily in the same timeframe, in which you trade.

Note the long Pin bar on the daily chart of GBPUSD (following the red line) on the screenshot below. However, as we move to a lower timeframe, the picture becomes more detailed. At the H1 and H4 charts, we see the same Pin-bar.

Moving to a lower timeframe (M30), we notice that there Pin-bar is no longer visible. Actually, that’s where cheating was committed. We see quite normal bars, which then break round level, and in the red area, the price reverses.

On a larger timeframe, where we saw a large Pin-bar and a clear rebound from the level, we won’t open the deal in the direction of the breakdown. On the M30, on the contrary, the price for a few candles is trying to break through the obvious level (which is the first sign of a trap) and after the breakthrough entices us saying that we should sell. Tempts beauty.

Types of traps

1. In general, almost any trap is a false breakdown level. The first such trap is a classic Double top/Double bottom pattern.

Certainly, those of you who have tried to trade a double bottom or double top noticed that often the second peak is slightly higher than the previous one, as the second bottom is slightly lower than the previous one. Although the original idea of pattern implies that the second peak will be slightly lower than the previous one, thereby showing that the market is not strong enough to continue the movement.

In fact, at the level of the first top we placed a stop-loss and stop orders, and the big players activate all of these orders, gaining liquidity, and, as a result, the market reverses.

2. The next one is probably the most offensive trap.

As we know, the classic definition of a bear trend implies series of successively lower highs and successively lower lows. That is, we have a well-established trend, and as soon as one of the highs was broken, the bearish trend is considered to be over.

But what often happens in reality? Price breaks the obvious level of previous local maximum at the same time collecting stop orders of other players, and then the trend continues to move in the same direction (down) and reverses. This trap is clearly visible on smaller timeframes like M30 and H1, where all the breakthrough movement takes a few candles.

That is, this trap is a breakdown of the local maximum or minimum in the trend correction. After the breakdown of the trend, everybody expects a trend change, but this is actually not the case. At first, because the classic technical analysis teaches us that the breakdown of the maximum on the bearish trend means that the trend has changed.

The logic of the decision is that if you see a breakdown against an established trend, it is likely a false breakdown, and you should be careful with such an entry. If the market is quiet, rebounds from the prices structure boundaries should be sought, that is, from the upper and lower boundaries of the channel.

3. The next type of trap is a news trap. I think, everybody faced it when the price is first flying in one direction, hits some obvious level and then reverses.

As you probably already guessed, to identify the traps we need to go one or several timeframes down and, respectively, to go one or several timeframes higher on our main trading timeframe, since we do not know where the trap was formed specifically. Thus, generally, the higher the timeframe, the smaller the number of traps.

4. Next, look at the trap at the opening of the session. Surely, a familiar example, when we have one motion before London, at the opening of London another one, which subsequently may also reverse. It involves the classic strategies such as “The Beginning“, “FX1D0” and many others. Again, in this case stops on important levels are collected and only then the price reverses.

In this case, to see exactly what happened, we had to go down ‘till to the timeframe M1, where the movement looks the most “plausible”. Here we see how the price has grown, and also see a clear rebound from the 1.4200 level.

So, when there is a breakdown of any level, whether it be a round horizontal level or local maximum/minimum level in the trend correction, we imply that most likely this breakdown is false. That is, we immediately assume that this is a false breakdown and trap, which aims to collect the stops of other traders. While the price was not fixed in the new zone, while there is no confirmation, we regard this movement as false. In general, when working with levels, a rebound from the level is always more probable than its breakdown.

Traps trade

1. When working with traps, we need several timeframes. As soon as we find a breakdown of some of the most obvious level on the chart, we turn to the timeframe in which the movement looks the most confident and plausible.
2. At the first sign that the price is ready to reverse, we enter, exposing a small stop (this is important), as there may be additional bursts, where we can easily fly out of the market. Working with traps requires some training and the first time your stop are likely to be triggered. So, in order not to let them eat your deposit, try to put small stops. There can be easily set 10 times more takes than stops.
3. We enter, put a small stop loss and as soon as possible bring the position to breakeven.

Conclusion

Once again, the traps are difficult to trade, but if you learn, at least, how to recognize them on a chart, it will give you a huge advantage over other traders.

Take care, Michael

ForexTraderPortal.com