March 12th 2008
Trading Traps
I have been lamenting the Fed’s insistence on playing to wallstreet. Sometimes I wonder if someone at the Federal Reserve has a personal vendetta against the value of the dollar. I know Mr. B and company are just trying to right this ship that is the U.S. economy. God bless them. I’m glad it’s not my job.
Today however, I felt like the Fed was in my corner. And I just wanted to say Thank you!
I had my eye on a potential bear trap in DIA. Trapping is a very simple concept. You want to see several days of strong moves in one direction and then you want to see the market gap in the opposite direction. It’s my bread and butter. I think if I had to I could make a living trading that pattern alone. Let’s take a look at how this one played out.
The first part of the setup is to find a stock that is trending in one direction and has had several strong moves in that same direction. Take DIA into consideration:
Once you have your stock, it’s a matter of putting it on a watch list and monitoring for gaps in the opposite direction. It just so happened that today was a great day for traps. Selling had been unabated of late and the Fed’s injection of liquidity probably accelerated some short covering.
Here’s the intraday chart using a 15mn:
I just took it over the high of the day.
Trading Traps is not a silver bullet. Bull and Bear Traps certainly do fail, but getting the gap in the opposite direction of the trend is an edge. The reason for this comes back to one of my primary trading concepts: Emotion equals opportunity.
All this means is that when things get crazy and people think the market is going to heaven/hell, the astute trade can make money with less risk by being able to see the trend change. It happened in 2000 and as recently as 05 in the major market indexes. It happens everyday with Bull and Bear Traps in individual stocks. You just need to keep your head above the euphoria/panic to trade it.
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4 Comments »
thewild1 on 12 Mar 2008 at 4:39 pm #
great post. i’ll be sure to add that to the arsenal
Jonathan on 12 Mar 2008 at 5:56 pm #
Thanks Wild1.
BTW, I’m not sure if I was clear enough, but I’m out these by the end of the day.
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