Chapter 32
Getting Trapped In or Out of a Trade
An entry stop can get you trapped into a bad trade, and a protective stop can get you trapped out of a good trade. It is reasonable to wonder how this can happen if most of the volume is generated by institutional computer orders—how can the institutional computers get it wrong so often? Those programs are often complex, and all of the institutions are using different methods. Some of the stop runs will be due to hedging or partial profit taking, while others will be due to scaling into a position, and most will have nothing to do with a 5 minute chart. It is simplistic to think that they are all getting it wrong and were trapped by a stop, or that the stop run was due to the relatively small volume that comes from individual traders. What appears on the chart is the distilled product of a huge number of traders who are basing their decisions on a huge number of different and unknowable reasons. The result is that individual traders sometimes get trapped into or out of the market. Most institutions are not trading tick by tick, and they are not concerned by these little moves because they know that the math behind their models is sound. They don't see these moves as traps; it is likely that most don't see them at all and instead rely on their models and on the orders that their customers want them to fill. High-frequency trading (HFT) firms, however, try to capitalize on any small move.
Figure 32.1 Trapped Traders
As shown in ...
