what are trapped traders?
when new positions enter and are placed in an offside position, they will naturally want to close, squeezing the market in the opposite direction.
This natural outburst of breakout traders being caught offside can be a great reason to look for a reversal.
Example 🔽
1. identifying trapped traders:
requires an understanding of open interest and delta, as open interest will categorically tell you if the majority of positions entering are new ones.
open interest increasing = new positions
open interest decreasing = positions closing
positive delta = longs
negative delta = shorts
breakout traders only appear when there's an increase in open interest; otherwise, most positions you see will be closing.
1) identify the candle in which new positions have largely entered
2) identify a level in which those new positions would be offside
3) trade in the direction of the new positions unwinding
Example ⬇️
2. why trapped traders matter:
offside traders, over large ranges/moves can be catalysts for much larger trending moves.
if price creates a range with new shorts accumulating within this range before breaking upwards, the resulting follow-through and squeeze could be significant.
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3. common patterns & scenarios:
1) obvious and clear pivots are levels where traders can become too eager, expecting large breakouts. As a result, any piercing of these levels often leads to new positions entering the market, potentially placing them offside.
2) large round numbers - are areas where people naturally trade the breakout of these levels, either up or down. These areas also tend to have a large number of stop orders placed. - 2 in 1 for liquidity being taken aggressively.
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