Previously, we took at a look at part 1 of our ‘Market Structures and Stop Hunts’ mini-series; examining the concepts of price action and phenomenon of stop hunts. Today we’re going to take a look at how a cryptocurrency trader can utilize knowledge of these to increase their market edge.
In these fantastically informative educational videos, Market Traders Daily describes the various forms of trading traps, as well as how to consider entering the market after the traps have been sprung. In short – large trading accounts (banks, high net-worth individuals, hedge funds) often deploy these forms of trading traps in order to avoid slippage.
This means that these accounts are able to accumulate most (if not all) of their market position at the desired price. By triggering stop losses of long/shorts, as well as trapping breakout/pullback traders, forced selling creates the necessary liquidity for large positions.
But how can retail traders use this to their advantage?
On the Coattails
Simply, being aware of stop hunts and trading traps is already over half the battle. Planning accordingly makes up the rest. As Market Traders Daily describes in their videos, merely observing the resistance/support line being respected again and again increases your opportunity of witnessing either a stop hunt or trading trap occurring.
By analyzing the subsequent market structure (types of candles, support/resistance, RSI etc) and importantly paying attention the Hard Right Edge (what’s going to happen next!) a trader can formulate what future price movement is most probable.
For example; allowing for the stop hunt to play out, and then placing your order on confirmation of the reversal, with necessary stop losses, should allow you to ‘ride on the coattails’ of the larger players position. Whilst trades can’t always go your way – waiting for what you perceive the trap or hunt to happen will increase your odds of not being caught in it yourself, and therefore take advantage of the ‘true’ (read: not manipulated) direction of the market.
Every trader and trading system has their own take on how to analyze and predict the probability of market moves. Although the validity of various price indicators is an article in itself – the existence, and therefore likelihood – of large position price manipulation means that retail traders should do everything in their power to protect themselves from, and therefore profit from, these larger players entering the market.