Trading Against Trapped Funds – Lucid Fx
- Disclaimer & Introduction.
- What are ‘trapped funds’ and how can we identify them?
- Stop runs and fake outs.
- Liquidity Pools.
- Price Targets.
None of my content is financial advice. Manage your expectations, do not expect to read this article and understand the content to its full extent. Take this insight and document it in your trading journal. If you aren’t sure how to set up a trading journal there’s a video on how I set mine up on my YouTube.
This ideology is incredibly important to my personal trading strategy. I’ve used this specific strategy for years which has led me to a full time trading career. If you scroll through my setups posted on my Twitter or Discord you’ll notice the majority of them will include a fake out (we will talk about this in the article) before I enter. Again, do not expect to read this and be successful right away. This will take practice and discipline, be patient.
Those of you that have been following me for a while know I like to keep my content short and to the point, so lets stop wasting time and get to it.
I hope this helps.
I would consider my trading strategy somewhat unorthodox. The backbone of every single trade I enter is identifying trapped funds.
So… what are trapped funds and how can we identify them?
The ideology behind ‘support and resistance levels’ is taught everywhere, its often one of the first things you learn when beginning technical analysis. So, if we know there are a large amount of traders / funds using support and resistance levels as a basis to their trading strategy, where do you think their stop loss orders will be?
Yup, you guessed it, below support levels or above resistance levels.
Now, the market has a tendency to ‘run stops’ before expanding in the opposite direction. When we see an aggressive run on stops we can frame a setup.
This is why I don’t use traditional support & resistance levels in my trading. If 95% of traders fail, what they’re taught must fail as well.
These price moves above highs and below lows will also sucker in ‘breakout traders’. These are people that chase aggressive price moves in hope of catching a larger move. This is where the term ‘trapped traders’ comes from. These traders will chase what I call a ‘fake out’ and are now trapped in a position, once they are trapped price will punish them for chasing and reverse aggressively.
We want to catch the move that punishes break out traders and stops out traditional support & resistance traders.
Lets take a look at some examples.
Things to take note of:
- Aggression of the raid.
- Aggression of the reversal.
- How support and resistance levels get exploited.
One of the things that we are wanting to watch is the aggression of the move that traps funds. We want the move to be aggressive, there may be a bit of consolidation below / above the swing point, that is okay.
Don’t try to catch tops and bottoms.
This will only lead to losses. I’ve found that the best way to trade these ‘traps’ is to wait for price to return back within the range with a stop placement below / above the fake out.
There are some specific entry techniques I use but that’s for another article.
Obviously it won’t look as simple as this in a live trading environment but what I’m wanting you to identify is the clean highs / lows, the movement above / below those levels, and the return back into the range. Its completely unnecessary to catch the top or bottom, trust me do NOT try. Let price prove its intent on reversing and assess risk from there.
Liquidity pools are basically an area of resting orders. Identifying these pools will be key to framing setups.
I’ve found the best liquidity pools are under clean high time frame lows or above highs. If you can spot these clean highs or lows wait for price to deviate them and frame your setup based off that.
Time for some more examples.
Again, the cleaner the lows the higher the probability and the higher the time frame the better.
Your first step should always be to identify liquidity as liquidity moves the market.
Now, as your experience grows so will your ability to identify these fake outs. Also, notice how catching the highs / lows is completely unnecessary. Wait for price to return back within the range high / low and assess risk from there.
If you’ve identified this fake out effectively there will be plenty of price expansion to catch.
Targets can be tricky.
The main takeaway is not to get greedy. I personally either place my take profits above a previous swing high or below a previous swing low. However, targets are incredibly situational and my targets are fairly versatile.
Theoretically price should return back to another liquidity pool. That’s why you’ll often times hear me say “Targeting this swing high.” Swing points serve as beautiful entry and exit points.
Lets look at the ideal situation.
Now lets look at one of my EURUSD shorts I posted in the discord.
Again, this will all come with practice, consistency and experience. Be patient and don’t be discouraged with losses.
All in all, this is a fairly simple concept that can be refined into an incredibly profitable trading strategy.
Just a quick recap:
- Identify liquidity pools.
- Wait for a ‘fake out’ to develop.
- Allow price to return back within the range.
- Assess risk.
- Target a previous liquidity pool.
As I said before, your identification skills will increase as you gain more experience. Your ability to identify these trapped funds will correlate directly with your ability to log and study price action.
Stay disciplined, stay consistent and stay patient.
I hope this helped, if it did be sure to:
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