Turtle Soup Anyone?

[Caseynotes]

The Turtle Soup Pattern describes a false continuation break that can lead to great reversal trades. Similar to a double top/bottom but price goes beyond the prior level to take out the stops before reversing fooling the unwary into entering thinking continuation.

 

You need to know of it because it is famous for suckering in retail traders to trade the wrong way thinking price has broken the prior high/low they enter and are then trapped. This is a bull/bear trap or a stop run.

 

Moritz of Tradeciety has done a short video describing how he trades them.

 

https://www.youtube.com/watch?v=Tp4I1vy24TI&feature=youtu.be

 

The pattern is from Linda Raschke's book 'Street Smarts' written in the 1980s but has been refined since then (can be downloaded free as pdf, just google search)

 

Michael Huddleston of Inner Circle Trader fame (ex hedge fund and institutional trader) uses it often and has produced youtube video's on it as well. He also did a lot of work for the babypips web site many years ago and wrote extensively about it on their forum pages.

Here Michael describes his OTE (optimal trade entry based on Fib) and why false breaks occur. If you want to watch some of his youtube vids be warned, he swears worse than Tom Dante and goes into regular bipolar induced rants (self confessed) which I find highly entertaining. 

 



 

Note that 'street money' 'reacts to price'  because it has to, 'smart money' can anticipate price because they are holding the massed orders in their hands.

 

 

 

 

 

 

 

 

 

[Caseynotes]

Bear trap, short squeeze, turtle soup, call it what you want, you need to understand this very real trading concept that catches out retail traders every single time. The problem for retail is the time frame, most use lower time frames for smaller stops whereas big players use a daily chart, on a intraday chart this looks like a breakout and may have even retested the breakout level. The key to avoiding it is to keep an eye on the daily or 4 hour chart but more important is to get very worried it the intraday price is unable to put in new higher highs (lower lows), that is the definition of a trend after all.

If you play a break out off the bat expect your entry to be retested, if you have waited for a retest price should not need to retest a second time, just get out. After all, you are expecting price to zoom away after break out and conformation (retest) if it doesn't something is very wrong.

 

Explained in more detail and how you can capitalise on it in this Tradeciety article and video here;

 

 

 

http://www.tradeciety.com/bull-trap/

 



[Mercury]

Some really great lessons in there  and the relayed article embedded in the initial tradeciety article on FOMO (or Fear of missing out) traders is a great lesson too.  Typically people who get caught out this way are either late entrants or just getting too greedy in my view.  If you are a long term or swing traders hopefully you identified the trend early and entered early and are ready to bank profits around the time of a bull/bear squeeze.  If you have a good set of risk management rules, especially as regards use of stops, then any entry would not cause too much trouble (better to avoid it though).  One of the reasons I use EWT among other techniques is to identify when a trend is likely to be coming to an end.  It is always a gamble to jump onto a sudden move, especially at the break of a previous high or low unless it fits absolutely your longer term set up.  Much better to seek the dips and rallies and buy/sell into them.  In the past when I got caught like this is was usually when I was down in the weeds and trying to predict the actual turn.  2 good things to remember to avoid this is to take a regular look at higher time frame charts to out your trading time frame into context and to wait for confirmation as the Tradeciety folks say.  I add to this now the 20 period SMA idea, which is a good additional piece of info.

 

 

[Mercury]

As an aside, a couple of things I used to do that caused me to lose out and never do now:

1. Try to catch the end of a motive wave into the retrace (I now wait for confirmation of the turn, which can often seem like a double top/bottom and is usually a deep EWT 1-2 retrace at a minimum)
2. Add to trades on a retrace move, I only do this on a motive trend (i.e. in the direction of the long term trend)
3. I also trade lower bet sizes on retrace moves than I do on motive waves.

All part of my risk management method.

[MacD]

Hi Caseynotes - thanks for that link. As a relative newcomer I find lessons of this type very useful :-)

One question that occurs to me regarding the example chart you attached is "When is the trap confirmed?"

On the downtrend, support is broken several times and then a retrace to the 20 sma takes place.

Would I be right in concluding that because the last break of support occurs for only a single bar before retrace to the 20 sma then that is the key identifier of the trap? Or is this just incidental?

 

Mac 

[Caseynotes]

Yes, FOMO is a killer but very understandable as all new traders lack confidence and so watch a set up go by uncertain, then try to chase after it.

The 20 sma (ema) is a great tool used on it's own or in the Bollinger Band package, (Tradeciety do a great piece on BB too). I know a great number of experience traders have used BB all their careers and swear by it. The 20 ema is the same as any indicator, if a lot of traders use it becomes more reliable rather than by any mystical properties (self fulfilling prophecy). I wont usually take a trade against it, not only on my own smaller time frame chart but also if price is on the wrong side the 20 sma on the hourly chart. Meaning I always want the 20 ema on the hourly chart to be behind the trade not blocking it.

 

Your point about stops is right and it surprises me hearing people widening their initial stop to 'give the trade a bit more room' There is only one place for a stop and there it should stay until you can comfortably move it in the direction of the entry price, never the other way. You need the stop to be in the same place as the bigger players because only they have a hope of defending it (taking the opportunity to add to their position) if the level comes under attack.

[Caseynotes]

Hi   That's a very good question and difficult to answer, everything is obvious with hindsight but in real time there is always the clutter of confusion, if there wasn't there would be no market, no one would take the other side of the trade. The bar or bars of the break are dependent only on the time frame you are using, on a 15 min chart price could have spent half the day on the break repeatedly luring more traders into shorts.

On the down trend the 20 sma IS the support (looking at it upside down) Number 2 is called a support level because that was the prior lower low where price turned up last, price action then became very minced (which is always a warning sign) crashing through the 20 sma several times before making another move down in an effort to make a new lower low and continue the trend but only succeeded in making a double bottom. Did strong bulls actually push the price down to stop out other traders and then take their long contracts for a big move up? who knows. It is said stop runs come in blocks of either 10 pip or 20 pip, rarely larger (just large enough).

 

The key points are;

Don't be married to a trade, if it's not working as expected just get out.

Whenever you see this wonky double bottom/top there is often a big, sharp move in the opposite direction so think I need to get aboard.

Also think differing time frames, these look best (as Linda Raschke describes in her book) on the daily chart, on an intraday chart it will look more like a rounded bottom and more difficult to see so check the daily often.

 

 

 

 

[MacD]

Thanks .

I suspected there may be no clear cut answer. As you say, who would take the other side of a certainty?

The more I learn, the more I realise that as much as I try to make trading scientific there will always be the art of it.

I do look at different time frames a lot to see if my trade ideas in one chart are supported on longer scales, but I sometimes wonder if I'm just chasing the perfect storm that never arrives

 

Your comment about 'bulls' pushing down the price and stop runs has intrigued me. Although I've heard about 'clearing out stops' and the like, I've been undecided as to whether it is a real phenomenon or a conspiracy theory!

I'll need to do a bit of googling and find out more

 

Mac

[Caseynotes]

Nice explanatory article update from Tradeciety. Bear trap, bull trap, turtle soup, call it what you will, you still need to know about it or you will get caught.

 

http://www.tradeciety.com/revisiting-the-bear-trap-how-to-trap-losing-traders-to-make-money/