The Psychology Trap of Conventional Learning

When it comes to learning, there are some things we all must learn the same way. Stop signs, traffic lights, enter and exit signs, how to know the men’s bathroom from the woman’s is an important one… There are many more universal items to learn including basic math and science, how to read and write, and much more. However, when it comes to learning anything that has to do with competition, be very careful with your focus. Remember one simple fact that has really shaped my career and life for that matter: If you learn and think things the same way everyone else does, you have no competitive advantage. If you learn to think different, you can really own a big edge in any competitive environment.

When it comes to trading and investing, to think it is anything but competition is a mistake. There is a buyer and a seller in every transaction and after that transaction, price either moves up or down which means there is a winner and a loser. 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 novice and profits for the professional. One of the most favorite and high probability trades we like to take in the Futures Extended Learning Track (XLT) is the Bull Trap or Bear Trap. For today’s piece, let’s take a look at a trading opportunity that we found using the Supply/Demand grid, a daily service produced by my team.

The opportunity was to short the USDJPY into a supply level from the Supply/Demand grid. The specific strategy is our version of the Bull Trap. Notice the supply level on the chart, the yellow shaded area and origin of supply zone lines. 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. Again, it declines because supply exceeds demand at that level. We wrap two lines around that level and carry that level forward because we want to remember where supply exceeds demand because that is where price is likely to turn lower in the future when it reaches that level.

Nov. 25th, 2014. Supply/Demand Grid Trade: USDJPY Shorting Opportunity

This is a strong Bull Trap shorting opportunity for the following reason. Notice the prior session high labeled “New Session High” (blue line). That high was the session high which is a number and event most traders pay close attention to. So, when price rallied back up to that high a little while later, many traders see this as a trading opportunity. The play is to either sell short at that prior high with a buy stop just above it or buy on a break out of that prior high. When price rallied back to that level, this setup bullish expectations for most traders. Traders are taught that when a high is broken, that is a breakout and price goes higher. Sometimes this is true BUT, when there is a fresh supply level just above as was the case here, this bullish and conventional thinking is a TRAP. What we were betting on with this shorting opportunity was that when price traded above that prior high, most people would become bullish and buy right into that fresh supply level where our strategy told us banks were heavy sellers of USDJPY. If this happened, we would be the willing low risk and high reward seller along with banks.

A bit later, after that high was put in, price began to rally. Soon, it rallied above that high (penetration of blue line) and a rush of buying came into the market as expected. Our entry price from the Supply / Demand grid was to sell short at 118.25 with a stop at 118.45. Price rallied up to our supply zone which ended up being the high of the session and proceeded to fall steadily from there as seen on the chart.

Back to the Bull Trap strategy. The key factor that makes this work is knowing how everyone is trained to “think” the markets. Most are trained to buy on a new high of the day and buy at supply (retail) levels. I am trained to do the opposite. When prices are at retail (supply) levels, I want to sell to the buyer who is trained to buy at retail levels and the Supply/Demand grid is designed to look for those types of setups and more. It is not designed from conventional blue prints, it is designed from competitive blue prints.

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 set the “traps.” It’s the old hunter and the hunted. I do apologize if I have offended anyone with what may seem like harsh analogies but the truth is, I want to send a strong message because the average person loses money trading and that’s not OK with me. They lose because they don’t have the edge the professional does. Learn to spot the difference between traps and opportunities. It all begins with thinking different.

Hope this was helpful, have a good day.

Learn to Trade Now