Traders get "stuck" in bad trades all the time. I have been there and I am sure you have been there also. You know the feeling. You get long, thinking this is it, the market is going to take off to the moon, only to see the market turn right from the price level you bought at and stop you out. It's a terrible feeling, but unfortunately, its part of trading.
However, there are times when it is obvious that traders are stuck in the market. Some traders like to use the term "trapped" traders, but that insinuates that other traders are out to get them. It evokes thoughts of conspiracy theories, and while there are some predatory traders out there, the real reason most traders get "trapped" is due to their poor trading decision making. They enter the trade late, they use lagging indicators, but mostly they are just not good at trading. That is the reality.
When traders are stuck in bad positions, when their trade is offside, they have to get out to avoid further loses. There comes a point they realize they are "stuck in a losing position" and bail out of the the trade.
Smart traders are quick to realize areas where traders are stuck (trapped) in a losing position and are starting to get out. Smart traders take advantage of this push in market direction by trading in that direction.>
In this chart, we had just reached the high of the day and started coming off. The market bounced up a little bit but couldn't sustain the move. All of a sudden price action traders and fib level traders are starting to think "this is a nice pullback, let's get short when the market takes out the swing low." However, just below the swing low, there are strong buyers entering the market and instead of selling off, the market starts to rally. All the price action traders and fib traders who were short, now have to start buying to cover their shorts. Their short covering and longer-term buying shows up in the order flow and now algos start picking up on it and also start buying and we reach new highs. This scenario plays out everyday in every market.
Imagine what is going on. You are watching the market and we seem to be in a down trend and you just got short, but something happened in the market, it could be a hedge fund decided to start buying. Not only has the move down stopped, but also the market is starting to move up. All of a sudden you are watching the market rally in your face, you keep checking your PnL, -$100, -$200, -$300, -$400 and you start thinking, if it gets to -$500 I am out. Boom, -$500 you are out as well as many of the other traders who also sold.
To get out of your short, you are now buying and so is every one else who sold earlier and is now covering. This opposing order flow to the earlier down trend is now read by the algos and the trend followers as a reversal taking place and all of sudden more buying kicks in and the market continues to rally.
What you initially thought was going to be a nice little trade in the short-term on your 1-minute chart was met with a longer term view by a hedge fund. The short-term intra-day trader just got run over by the long-term macro trader. You became road kill.
As order flow traders our primary job is to take advantage of short-term opportunities. Every so often we encounter a market situation to participate in a longer-term move.
The Orderflows Stuck Traders indicator seeks out when short-term liquidation occurs in unison with longer-term views of the market.>