The 3x8 Trap Setup By Rick Saddler Introduction The Markets are designed to take money out of the pockets of unprepared, amateur, or unskilled traders who do not understand the trading environment. Large institutions with professional traders operate in the markets for their benefit and because of their size, basically drive the markets. For a retail trader, the only way to be successful is to develop rules to control their emotions and give them an edge so that they can trade along side of the professional without getting wiped out. Retail traders can achieve an edge in the market because they can, with practice, see the tracks of the large institutions in the price movement of the markets and equities. Retail traders can use this information to enter and exit the market with a much quicker response than a large firm holding huge positions. While there are many issues that a retail trader must face, they are not impossible to overcome. The main issue facing a retail trader is to identify when an equity is under an accumulation by institutions as buyers are stepping up, or is under a liquidation, as sellers are taking charge. While it is beyond the scope of this article, every retail trader must adopt a method of understanding the market conditions and be able to identify an uptrend, consolidation or downtrend character of the markets. As technical traders, price action is fundamental to our analysis. Using moving averages helps smooth out the price action chop and allows a trader to identify trends over time. For example, it is commonly accepted when price is above the 50 simple moving average (10 weeks of time for a daily chart) and the average is moving higher, an uptrend is in progress. When price is below the 50 simple moving average and the average is moving down, then a downtrend is in progress. Trading with the trend is the one of the best methods for following a market and equities. By using patterns or setups within a trend, we can identify quality trading opportunities. The Setup and Examples If you study chart patterns, you may notice that there are patterns that price action will form and repeat in a broad trend (either up or down) as an equity trades over time. By using shorter time frame averages, we can identify these patterns as they develop. The most common pattern www.tradersworld.com April/May/June 2021 96 for any equity is that price will enter a consolidation area and then move out of that consolidation in the form of a breakout higher (or a break down lower). It is by identifying these breakout opportunities that a trader can capitalize on the movement of price as a trend progresses. At Hit and Run Candlesticks, we use a simple setup to identify a pattern within a trend we call the “3x8 Trap”. On a daily chart with candlestick bars, we add the 3 exponential moving average (EMA, pink, dash) and the 8 exponential moving average (EMA, black, solid). The trap is formed when price consolidates back towards the main trend. As the price moves, the 3 EMA will pull down toward the 8 EMA forming a trap for price. We call it a trap because price becomes “trapped” between the 3 EMA and 8 EMA as it consolidates. This pattern provides a very clear potential entry that also shows you a very clear stop area for a trader. If the price fails the 8 EMA, the pattern is broken and if a position is open, it can be closed quickly with minimal loss to the trader. If buyers, in a bullish pattern, start accumulation of the equity again, we can see the trap trigger as price moves up and the 3 EMA moves up away from the 8 EMA. Southwest Airlines, as an example, recently started a new upward trend out of a consolidation area. While trading out of this consolidation is possible, it is not yet a trend and if we wait, we can see that there is a 3x8 trap that forms as the uptrend develops. This is the opportunity that we look for in a bullish 3x8 trap setup – evidence of a bullish trend, a consolidation as trading institutions pause in their accumulation of the stock, a 3x8 trap forms, and a resumption of the uptrend occurs as buyers step up their activity. (See Fig 1). Fig 1: LUV, TC200 charting software By identifying the 3x8 Trap, a trader may use the opportunity to exploit the normal consolidation www.tradersworld.com April/May/June 2021 97 and breakout patterns that occur in a trend. Sometimes it can happen multiple times in a short span of time within a trend. (See Fig 2). Fig. 2 JNJ, TC200 charting software One of the key advantages of the 3x8 trap is that there is no anticipation, no expectation, no infusions of Hopium for the retail trader. The pattern is simple and easy to identify in the stock charts in your watch list of stocks. You can “see” it coming and then set alerts for movement out of the trap and decided if the conditions and your account are ripe for a trade. In Viacom, ticker VIAC, traders in our room were able to make very good money as a 3x8 trap developed, manifested higher and then paused once again. As the chart shows, it is setting up another 3x8 trap which may trigger another move higher. (see Fig 3). Fig 3: VIAC, TC200 charting software www.tradersworld.com April/May/June 2021 98 The pattern also forms to the downside. In a bearish setup, there must be an overall downtrend in the equity, the 3 EMA will be below the 8 EMA. As price moves back to the 8 EMA a bearish 3x8 Trap will form. If price continues to move lower, the trap will alert to the downside. (See Fig 4). Fig 4: AAPL, TC200 charting software Regardless of a bullish or bearish 3x8 trap setup, the stop loss is fairly easy to determine as a movement to the opposite side of the trap is a sign of failure of the pattern. If the trap triggers in the direction of the trend, it will also be obvious as a candlestick pattern will form indicating bulls or bears are in control. Benefits & Cautions At Hit and Run Candlesticks, we prefer the simplicity of the 3x8 Trap as it allows us to be comfortable in our trading as we patiently stalk the setups in our watch list of stocks. When we see the setups form and alert, then we can decide if it is a good time to enter a position. There is no chasing, no urgency, no drama involved. This builds our mental equity as we gain confidence in our practice as retail traders. When there are no setups forming or the market conditions are not conducive to trading continuation trends in equities, then we employ our SOH trading style… we sit on our hands and study charts. Or we enjoy other activities with our family and friends away from the markets. Some of our members have found relief from their self-imposed trading pressures by adopting a 3x8 Trap trading plan. This “sport” has a very long season and there is always going to be a new game tomorrow. It must be made abundantly clear that not all setups will manifest to a positive outcome. Every technical trading setup involves some risk of loss and is never a 100% guarantee. Retail traders must discipline themselves to the understanding that we have only one proactive choice when www.tradersworld.com April/May/June 2021 99 we decide to trade - our entry. Every decision after an entry is reactive to the conditions that develop in the market and/or equity. We need to decide what our rules are and how we will use them to protect our mental equity and financial equity. We believe the 3x8 Trap is a superior setup as part of a technical trading plan for equites in the market. Track Record & Results In 2018, an account was opened so that we could show this setup in real time and with 100% accountability to our members. The account was made public during the trading day and at the end of each month. The account was started with $5,000 with a goal of achieving 100% return within a twelve month period of time. Only directional options, calls and puts, would be used in the trading of only the 3x8 Trap setup. Within a few months and relatively exciting success, the account was renamed “The Road To Wealth Account”. After 22 months of active trading, the account had risen to over $70,000 at which time it was closed out. Many members of Hit and Run Candlesticks observed this real time and some even benefited by participating in the trading room and trading their own accounts. In August of 2020, we started another Road to Wealth with a $10,000 basis. Again the rules were the same – only directional options would be used to trade the 3x8 Trap setup, with a goal of doubling in 12 months. Currently, the account has a valuation of just under $30,000. That is a 192% gain in value in just five months! Some of our more disciplined members have reported similar, and in some cases much better results. You can follow along with the account and get links to videos at https://hitandruncandlesticks.com/trading-results-2/ DISCLAIMER: Investing / Trading involves significant financial risk and is not suitable for everyone. No communication from us should be considered as financial or trading advice. All information provided by Hit and Run Candlesticks Inc, its affiliates, or representatives is intended for educational purposes only. You are advised to test any new approach before implementing it. Past performance does not guarantee future results. Conclusion The 3x8 Trap is a simple setup that anyone can employ in their trading program as part of their trading plan. Our members have achieved great success on a daily time frame as swing traders. Longer time frames for investors and even on short intra-day time frames for day traders and scalpers. Some of our members are achieving greater than a 70% win ratio over extended periods of time. There are nuances that will improve the odds of success – identifying entry signals, setting goals for exits, placing stops – that have to be taken into consideration of any trading program. However, if you set up your charting program and start tracking stocks in your watch list, we believe you will be able to find the 3x8 Trap very quickly and easily. You may chose to add the setup to your trading program. If learning more about the 3x8 Trap and how we use it to capture gains in the markets is of interest to you, please consider joining us at Hit and Run Candlesticks, HitandRunCandlesticks.com Rick Saddler Founder of Hit and Run Candlesticks www.tradersworld.com April/May/June 2021 100
