Short traps on rigged stocks
Updated: May 18, 2021
The advantage of trading manipulated micro float stocks is that it allows traders multiple ways to trade it and execute on edge (long or short depending on which stage trap is in). It also provides many entry opportunities since most traps are set with broad moves and volatility (usually 2 hours or more). This is a distinct advantage compared to a trading ticker that fades straight from the open, which only giving traders very limited entry opportunities. Often traders complain about manipulated tickers, but the reality is that consolidated-manipulated tickers with decent range provide plenty more opportunities than tickers that just fade straight away and never look back.
It does come with its negatives as well, however, in some cases, the rigger/manipulator might quickly unload a considerable size, and if the trader is long, that can cause a significant loss. It is crucial that the trader understands the sizing of position well and to never risk too much on any single entry, just in case of offload or big price push from rigger if short, as those very quick pushes or rug pull washes are frequently present on manipulated tickers.
On the article, there is an outline of specific variables that are present on rigged (manipulated) assets, which traders should pay attention to. All variables should overlap together; it is essential not to isolate single variables and expect the asset to be a potential short trap just based on a single variable. It is also crucial to keep an open mind; just because the asset is displaying all variables of rigged/manipulated asset, it does not mean that the market maker-rigger will always succeed at creating the trap and its final outcome. In some cases, it will fail, and the result of the move will be completely the opposite of what the usual pattern should do if the rigger gets trapped.
While those traps mentioned in the article are present across all markets, the focus of article is on small-cap stocks mainly, as there are the most frequently present.
Types of short traps
1.(Type 1) Big short trap
Stages of manipulation confirmation on microfloat stock for type 1 trap explained below (manipulation with an aim to create short squeeze). The term "microfloat" in the article mainly applies to stocks with a float under 5 million shares. While the Type 1 trap is present on tickers with thicker floats as well such as 20 million shares, the behavior below is specific to smaller floats only, where it will be easier for the rigger to absorb and distribute liquidity quickly.
-high volume of over 5 million shares within first 1 hour of trading (9:30 - 10:30 NY time)
-300k volume per 1 minute candle, consistently printing such candles
-heavy volume washes confirming single-player (rigger) unloading
-lower highs, consolidation, and more high volume washes
-unusual spikes out of nowhere, confirming single player handling the asset
-structure with at least 3 lower highs (M5 time frame)
-last 1-2 hour before the market close sudden surge of volume 100k+ and push
-breaks last major high on volume
-short squeeze in progress with clearout attempt (85% success rate if all variables match)
Once the asset starts stacking and actually following the above variables step by step, then the trader can start to expect the EOD (end of the day) short squeeze.
Below is an example of a such large symmetric short trap, Type 1 play. This trap is usually laid out over a longer period of time, usually 2-4 hours on an asset that is trading strong on a day often above 70% gain (for example stock that goes from 2,00 USD to 5,00 USD in one day).
2.(Type 2) Small asymmetric short trap
Below is an example of an asymmetric smaller trap, usually set in the last 45 minutes of trading. This one is often present in large-cap equities as well. This trap is usually laid out if the rigger has already removed the short liquidity before with HOD clearout earlier. Time on example bellow is noted in NY eastern time.
3.(Type 3 ) Nasty short trap with huge volume and large price spike
Below is a more unusual example of a short trap, specific to microfloat assets; this one is especially problematic if the trader is short because it might be hard to get out and cover quickly, especially if the asset is under SSR (short seller restriction). RKDA is an example of a ticker that had 2 of such traps in 2019.
4.(Type 4) Demand wash with support reclaim trap (combo trap)
This trap is very common in all markets. In small-cap equities, it is usually laid on the front side of a very strong bullish trending ticker. Rigger will flush out demand with a new lower low and then push price back inside structure and squeeze into HOD and clearout. Reclaim of underwater support is going to be usually a key variable to look for. In this trap, both sides of the market are cleared out, first longs than shorts. This trap can be played long on support reclaim and then shortly after HOD clearout (joining the side of the market maker). This trap is especially most common on tickers with a float under 2 million shares.
No major underwater supply
On tiny float assets with 1 million shares float or below, it is much less meaningful to plot any resistance lines on the chart because if the asset is rigged, MM will soak all the shares that he wants which makes historical resistance lines less meaningful. The price will go as far as rigger wants it to go; that is the bottom line, but only if the asset trades on strong volume relative to the float size. On the tiny float, all sellers are soaked up quickly. Once that is done, any historical price levels are meaningless since there is no underwater supply participating in future moves from historical higher price levels.
What matters for resistance plotting is the historical volume traded (and potential dilution from the company); if asset trades on powerful volume (on the current day), then it is no need to plot any overhead resistance lines. Meanwhile, If the asset is trading on weak volume on the current day then perhaps it might be good to plot the resistances of overhead levels as that overhead supply might still participate and reject the price from climbing further.
Round dollar numbers (5,00, 7,00, etc.) with clear participation of limit orders on Bookmap / tape are a better "resistance" guide than plotting historical chart lines on assets with tiny float usually. Always prioritize live-action over historical when it comes to order flow, both are important but especially on small floated asset trader needs to understand why live order flow is that much more important.
The majority of rigged assets will have no major underwater high volume supply on asset (from the past several months). Once the asset puts rig day on with 20 million traded volume, it is highly unlikely it will get rigged again for at least several months unless it gets rigged straight away the next day and the MM is still holding many shares (strong close by EOD). This is just based on overall statistical data of rigged assets.
Checking the daily chart and the previous historical significant volume days over the past 3-5 months is thus essential to gauge if the asset has a decent chance to be rigged on a day or not. The market maker might not want to rigg asset with strong high volume day from the previous month, because there could be a large number of underwater sellers to sell into him, making the manipulation process harder and demand more capital for MM to sustain the price. However, this is mostly speculation on my part since it is hard to prove with real examples and insight into level 2 flows.
A conceptual example of no overhead supply (previous historical volume versus today's volume on stock and its relevance to plotting resistance lines):
Lower highs (in the money short liquidity)
One key component that most short traps will share is a consistent progression of even or lower highs. The reason for that could be twofold:
1.Density of stop losses and panic covering will be more visible to MM rigger (overhead liquidity) if the asset progresses with consistent lower highs.
2.Consistent lower highs project "weakness" of asset luring in more shorts.
3.Lower highs ensure the more significant probability of a large portion of short sellers still being "in the money" since many short sellers use the last major high breach as stop loss.
Thousand traders, thousand trade ideas. But what is interesting is that no matter what indicator traders are trading or what reasons they are using for entry, there is one common thing that draws many traders to the same board: how stop losses are set and where the panic begins. The majority of long traders, no matter what they trade, will set stop loss under lows, and the majority of short traders will set stop loss above highs or plan to cover if the price gets there. This reason is precisely why MM rigger will always take that last bit of liquidity and clear HOD or LOD (low of the day) on traps. And the more consistent the highs or lows are positioned, the more traders will stop losses under/over such a price area.
Below is a conceptual example of the usual liquidity difference of short covering and stop losses based on how the price structure progresses (exponential progression of lower highs versus even highs or slightly shallower highs).
The majority of rigged equities will have the float under 5 million shares. The lower the float, the easier it is for the market maker to soak the float/sellers at a preferred lower price and then play the games afterward. The higher the float, the more offers can unload into him after the price starts climbing, presenting more risk to MM (especially with underwater supply). Riggs also happen on floats such as 25 million shares float assets, but they are much rarer; only 1 such asset was rigged in 2019 ticker LJPC.
Example of tiny float and small market cap on rigged ticker FFHL.
The smaller the float and the smaller the market cap, the easier it might be for rigged to squeeze the shorts. It takes less buying power, and in such case, often rigged will be clearing out longs as well before forming a short trap.
Checking float for potential rigged play is the most important variable trader has to do in pre-market or afterward. Personally, I use three different sites to cross-check what the float is, and I do not use finviz usually due to less reliability. And for better accuracy, it is best to check the actual fillings of the company just to make sure that the float number is accurate.
A site that can be used for checking the fillings of the company (10 Qs and offerings for a number of shares):
Those two sites are quite accurate on float reports usually:
Checking the availability of the short shares
Usually, stocks that are rigged have aggressive short participation; it is often worth checking if the asset is hard to borrow or easy to borrow at your or other brokers or to check if borrows are still available for it. If the asset is easy to borrow at many brokers, it is likely to have stronger participation of retailers on the short side and potentially be more attractive for the market maker to form a trap and squeeze short sellers.
However, do not fall for the over-stretched sayings in smallcap market niche of "easy to-borrow stocks all squeeze, so watch out." Such statements are entirely disconnected from reality, as the actual performance rate of squeezing tickers with ETB shares is much lower than the word "all" points towards. It is a worthy variable to pay attention to, but only if the ticker consolidates for a while on high volume. ETB will only play a role then if plenty of those easy to borrow shorts are clustered together at similar prices.
Is it an algo?
Many traders are pointing out that this is the work of an algorithm, it might be, or it might not be; there is not enough proof often to call it. Algos are certainly participating on those tickers (Level 2 action), but to say that trap is laid out by algo every time would be a pretty big guess. In the end, it really does not matter; as long as the trader learns the pattern, that is all it matters; it does not matter if it is a robot or a human behind it.
The goal on rigged play might be few folds.
1.Push the asset up to use offering and raise the capital for the company
2.Push the asset up to exercise warrants
3.Push the asset up to squeeze the shorts and unload into longs, gains for MM
4.Or whoever knows what else...
The reason to point those is that traders should not worry too much about picking the hidden macro agenda behind the rig. Nobody really can pick the agenda very accurately on case to case basis (only over 100 samples it is possible with decent rate); even with historical data, it's too much conflicting information, unless you are an insider. The primary focus should be learning how a trap is set to extract the edge from it, and that can be done without knowing the macro agenda. Before the macro agenda, the micro agenda is how they rig the asset to push for the squeeze and how the price develops and behaves is what trader can extract edge from.
The main micro agenda on most rigged assets will be HOD (high of the day) clearout. This is what traders can focus on and play the long side to catch that liquidation move (squeeze) when it comes, often in the last hour of trading before the close. Longing ahead of a clearout and shorting the clearout if it has heavy volume and price cannot hold above. Those are two main opposites to play traps; however, they are not the only way to trade the trap; it is usually that those two entries provide the best RR on trade and are personal suggestions only.
Often the assets that trade on thinner volume or are very low float (1 million or under) will be clearing out both sides of the market before the actual micro agenda is achieved. They will clear out longs before they push the price up to and clear the shorts before they unload; the reason for that might be because MM does not want to have offers that fight him when he is pushing the price up (due to tiny float), or shorts covering into him when he is trying to clear out longs. Both of those cases might put more strain on MM that is rigging the asset.
This makes those assets much harder to trade, and often many traders will have losses on those assets if the trader is reading the trap poorly.
After HOD is cleared out with a quick spike, often MM rigger will form a micro shelf within the next 15 minutes. The goal is to perhaps soak in more short covers (because the price might need to hang around HOD so that all shorts notice it because not everyone uses hard stops above highs), and also they might want to lure in some long chasers, which allows them to unload into them more straightforward.
Microshelf size is usually the size of the bid/ask spread, which means that the actual size will depend on the asset itself. For example, ticker that trades on tight bid/asks spread (1 cent) might have a very tight micro shelf (3 cents wide), while tickers that trade on wider spreads will have deeper micro-shelf.
When microshelf is formed, the dump will often proceed from it, thus a vital component to keep an eye on. Often those offer good RR on the short side.
Below is a conceptual example of microshelf.
Example of microshelf on RKDA after the HOD clearout, followed by rug pull.
After hours game
The last piece of the puzzle on rigged assets is an after-hours push.
After ticker closes strong on a day, some assets will also be followed with further after-hours action and more upside. Statistically, most common is to see a slight push 20-40 cents after the market close; big AH pushes are rarer. Usually, the volume is the main tell-tell sign if a stock will be pushed much higher; most strong rigged AH plays print 20k M1 volume candles within the first hour after market close. If the asset does not match those volume numbers, it is unlikely to significantly push in after hours. 20k numbers are however relative and meant for 2019 volume conditions, for 2020 those would have to be raised by 3 times.
Below is an example of a slight push after the close where the asset did not meet the required volume numbers for further sustained move.
Example of ticker FRAN, which did put 20k M1 volume prints and had substential AH move after. Volume is the key in AH to tell if asset might have larger move.
Below is an example of asset with very strong AH (after hours) push and strong volume.
Examples of strong AH trading were on tickers BPTH, AKTX, SEEL in March 2019.
Trap examples (look above for type 1-4 traps):
Type 1 trap below on LJPC.
Type 3 trap on ticker AXCT.
Type 1 trap below on ticker CETX.
Type 1 trap below on the ticker ELTK.
Type 4 trap below.
Type 3 trap below.
Type 1 trap below.
Type 4 trap below.
Type 1 on ticker OPTT below:
Type 2 trap below on FFHL.
Type 4 traps below.
Is this play going away any time soon?
Shorting small-cap stocks and hard-to-borrow stocks is becoming more and more accessible by more brokers each year, providing access to shares on those stocks. For that reason, it should be expected the frequency of rigged assets to not just fade over time but potentially increase in more and more such examples. A few years ago, there were only a few decent brokers with access to shorts on such assets; today, dozens of new brokers create more shorting volume of retailers on stock, giving riggers more opportunities to form the traps, especially on short side.
Symmetry of structure and its importance
The majority of the biggest traps will have strong symmetry behind the price structure. This is relevant to any market, whether it's stocks, crypto, FX, futures...When the structure is the very symmetric, most market participants will start to track the same price levels, around which they will stop out, which makes for rigger more predictable and easier to stop out and clear those traders out from positions. On strong symmetric traps, the rigger will often clear out longs first and then go for shorts; this is part of the type 4 short trap.
The more symmetric the bounces are, the more long traders will stop out once the lows are cleared, and the more short sellers will use symmetric highs to stop out of short. Thus it is a crucial variable to listen to if the structure is very symmetric and the asset is strong on a day; there is a decent chance for trap type 4 setup. Consistent symmetry attracts participants and condenses the actions of traders around symmetric key levels. Most long traders will participate in long because if the asset has bounced five times, it should bounce the 6th time as well, right? And the majority of short sellers will participate within the same thinking; if an asset cant breaks highs five times, it should maybe also not able to do it the 6th time, right? That sort of thinking is what the market maker/rigger is looking for to set a trap.
What often riggers like to do is put cheese into mousetrap just to start luring the intended liquidity target as they start to build the trap. They often put the strong impulse leg (usually the bull leg) to start luring longs ahead of the long trap (rug pull). That is why traders should be cautious when an asset puts an unexpected strong volume leg out of nowhere, and the price starts to build the symmetric structure. On micro float stocks, that will be in high chance of a trap in the making. A significant variable for a trader to track. Big volume leg out of nowhere... and then symmetric structure. On highly liquid / commonly traded assets, it is more common for an asset to set up symmetric structures; on more thinly traded assets such as microcaps, it is far more unlikely for an asset to do that due to higher retail participation and asymmetric opinions. That is why on the AAPL ticker, symmetric price consolidation might not mean that much, but on microfloat assets, it is more likely that the market maker sets up a trap.
Such example below on ticker EDSA, long trap, followed by a symmetric structure where support was clearly artificially propped until the rug was pulled and longs were traped.
ARCI ticker below with type 4 short/long trap and symmetry of behavior around key support line and around highs at supply.
Are short sellers are "in the money"?
To look for potential targets where a short trap might push, it is essential to look left on the current intra-day chart and check the price levels where short traders are potentially in the money and still potentially holding their shares. One minute time frame (or under if possible on the platform) has to be used for this, so that trader can precisely see which price areas on the move down have not yet been retested; those are the price zones where short-sellers are potentially still in position and riggers might target those areas.
The reason why this helps traders is because not all short traps will clear HOD. In some cases, if there is no liquidity above or the price hasn't traded enough time, there might not be worth it for riggers to push the price above HOD.
Priority target areas are always price structures/zones where price has consolidated for a long time because, at those, there is a higher chance that many short sellers have participated and the stops of such traders might sit in a cluster above. For example, the opposite of that is price structure with a single high where price was rejected very quickly on low volume, on such structure, there was less likely significant short selling volume.
An approximate way of which zones might be a priority to be targeted by rigger and are likely to contribute to short squeeze target is outlined on image below. This is not by any means perfect science. It is just based on research of 300 tickers on my part that were rigged.
Price zone should be un-tested to be considered valid for EOD short squeeze attempt. Because if the level was already tested/broken on upside chances are many short sellers have already covered and stopped out, which puts such zone in lesser likely chance of being targeted in future once again. Always look on the left of the chart who is still sitting comfortably in untested position as short seller.
The conceptual example below:
One of the critical variables to tell if MM rigs the asset at later stages of trading (after 1:00 PM of NY time) is heavy washes that are quickly reclaimed. The rigged asset will show different price movement anomalies, which will reveal a single player behind the asset doing the work. Usually, on nano float assets under 1 million float, the rigger will clear out longs before they push the price up to squeeze shorts, and often that will be done with strong washes if that high volume wash is quickly reclaimed (for example, within 5 minutes), that often is a variable that MM will keep doing this until EOD push. Once strong washes are present with quick reclaims, it is safer to long-only on washes and not on strength. Otherwise, one is trading against the market maker-rigger. The reason why this variable matters mostly after 1:00 PM is because the liquidity will usually dry by that time, and the manipulating actions will be more clear by that time. Lion does not stand out in the jungle, but he does stand out in flat savanna.
An example of such ticker RKDA on the day it was rigged of 9th August 2019.
Also, another thing to note for the potential rigged stock is if the asset has strong washes (quick wash 10 seconds), but the asset is still holding support and is overall reclaiming those heavy washes within 30 minutes. If such behavior is present, chances are rigged, and there might be the end of the day short squeeze present.
Bellow such an example of RKDA on August 10th.
The reason why this variable does matter to spot potential rig is that in most microfloat assets that are not rigged once asset starts to put heavy volume washes the price will not reclaim them and asset will fade towards the end of the day. It will be more of supply imbalance confirmation rather than anything else. The usual market reaction is that when there is a sudden quick drop market tends to sell off some more as longs panic out if price reclaims very quickly up the wash it is often the rigger behind it, as it is less likely that the market would suddenly buy strongly into the strong drop. General market participants are more of followers rather than initiators; MM riggers are initiators.
Example of non-rigged asset below on ticker PSTV, where once the heavy washes started, price did not reclaim any of the last washes. Such assets will very rarely get EOD short squeeze, at least not in any sense of large trap with HOD clearout.
Again this is not about isolating variables, expecting that because an asset does not reclaim washes, that trap is unlikely to happen. All the other variables matter and how they fit into the context. How long did price not reclaim washes, how many % has the price dropped over the last hour without reclaiming them, what was the volume on washes compared to bullish pops, how much of overall gap did asset gave back, what other above variables did, or did not asset met...It has to all stack up into same direction along with wash behavior.
Traps are all about fitting the right variables into the right context.
The time window for trap layout
Different traps will be set within different trading hours. Type 1 traps are the most common in the last hour of trading (3:00-4:00 PM, NY trading time), type 3 traps are most common in the first hour of trading, type 4 traps are most common in the last 2 hours of trading, and type 2 is set across an hour. This is just based on overall collected data of the traps, and it can help the trader to identify if the asset is currently fitting the trap potential and the hour matches the type of trap; there is an increased chance that the trap might play out.
The last hour of trading is the most common for a short trap, the reason perhaps because most traders that are short expect demand to weaken towards the last hour and the asset to sell off, thus at that hour market maker has the largest short liquidity to play with. But that is the only assumption I have no actual data to back this by.
Example below of a trap set on PSTV in last hour of trading, 3:00 PM of NY time. Type 1 trap.
In many cases of short traps, especially the extended ones that were in consolidation for 2 hours or more, there will be a noticeable volume surge around 1:00 - 3:00 PM NY time. Thus watching the volume is one of the critical components for the potential trap in the making and the incoming squeeze. Volume has to be on pushes, not on drops, and tape should show plenty of ask aggression from market buy orders.
Such example on ticker ABIO and ATAI bellow:
Strong impulse bull leg
The initial starting variable of almost all type 1 or type 4 short traps will be a strong impulsive bull leg on plenty of volumes. If the asset does not put in that variable, it is improbable for the type 1 or type 4 trap to be set. Rigger needs to bake that momentum to put the meat on asset and start luring in shorts. The higher the microfloat asset goes, the more aggression of shorts will be initiated usually. That impulsive leg could be in the size of a single M1 candle or size of 20 candles, sometimes more, sometimes less; the thing that matters most is that it needs to have a good overall volume on it. For example, a 2 million volume push across the leg is a solid start.
Once the asset puts a strong impulsive leg and starts to build a very symmetric structure with bid defense on demand (example FTFT below), rigger is likely setting up a type 4 short trap (long combo trap).
Strong impulsive bullish move and trap set afterward on FTFT ticker example. The leg is highlighted by the blue line.
Putting it all together
All variables put together, confirming potential rig. It is essential to listen to all variables to match likely rig; it is not enough to say if the asset is up 50% by the last hour, it is a chance of a short trap. Such a statement will include too much data noise from stocks that are not rigged at all. Thus it is critical to have many variables match before "confirmation" can be made. Putting word confirmation in brackets, because at the end, no one really knows if the market maker will pull the plug or actually play along. Timing is everything on the trapped asset, to know at which stage of rig one should long on weakness and where to long on strength, or where to short into strength or short into weakness, this will all depend on which stage of trap the asset is on. When an asset is heavy washing but reclaiming washes, it is better to long on weakness (into drops), and when the asset starts to put strong volume push and is holding, it is better to long the strength. The biggest risk to reward short trade on type 1,2, and 4 traps will be after HOD clearout.
Below is an example of rigged play on August 22th on ticker NETE. By the last 30 minutes, all the variables matched and signaled a potential trap in the making and EOD short squeeze. Sometimes asset will be clear from the first 2 hours that it is rigged, and in some cases, it might only become more obvious towards the last hour before the market close. And then there are those setups that only become clear after the fact in hindsight.
Generally market always finds a way to make trading harder. If there is a type of assets such as microfloat stocks (often weaker companies) that have consistent dilutions or stronger supply and fade of news, then some market maker will find a way to make the "usual" asset behavior unusual, especially if too many short sellers get too comfortable. The same can be applied on crypto assets but in opposite direction - on the demand side.
Traps are usually laid out against the usual direction of where retailers participate.