Did You Catch This Trade On IWM?

September 28, 2014 0 Comments

As many know one of my favorite trading ETFs is the IWM. There is rarely a day that goes by that I am not taking a trade on this. As an options trader you can capture 40%+ moves on this almost any day of the week. If you are a stock trader then using one of the leveraged ETFs can result in good gains as well. I am doing this post as tonight I will be going over this trade setup with a client that I am mentoring. Let’s take a look at the trade setup.

Five minute chart of iwm.

Five minute chart of IWM.

Going into the day I had recognized a possible fib resistance area from the daily chart. It was the 23.6 level at 111.22. (Whenever I do day trades I always identify key levels off various time frames.) This was both a target level and a resistance level going into the day. The markets in general were trading sloppy and IWM was no exception.

One thing that was noticeable on IWM was that it was trading in a volatility compression. (The red dots on the chart is an indicator that shows this in a graphical way.) For those that do not know what a volatility compression is; it’s  when the bollinger bands compress. John Bollinger, the inventor of the bands, stated that volatility compressions usually lead to a volatility expansion. It is this expansion that can lead to big violent moves in the price of a stock. IWM was also trading in about a 60 cent price range.  IWM has a daily ATR (average true range) of 1.48. So I was expecting a move; the question that remained was what direction.

The candle momentum indicators that I use were mixed. They were going from green (bullish) to blue (neutral). A symmetrical triangle was forming. DMI was flashing between buyers in control to sellers in control. (That is normal when trading in a compression zone.) Finally around 1:50 I started to see some bullish action. We had three up candles and the regression turned green. MACD histogram also turned positive. Momentum candles turned green and we were off to the races. IWM was ready to make it’s move. ENTRY was at 110.68 with a tight sop at 110.60. Yes, we used an 8 cent stop. If we were wrong we could always get back in. I am not willing to take a huge loss on an option that is going to expire in less than two hours. (If you have traded the last two hours on a Friday then you will know what I mean.) As an FYI trading the last two hours on a Friday is one of the best times to be trading if you are an options trader. The moves are fast and this is the time when you can capture 100%-200% while putting 25% at risk.

IWM broke out of it’s volatility compression and went exactly to penny to the retracement level that I had drawn the night before. Depending on which option strikes you chose that would have been more than a 100% gain in about 45 min. Not bad with a 6 cent risk in the ETF price.

These setups happen every day. We scan for them in the chat room and I teach them to my students every day. If you want more information on the services that we offer, please join the email list (you also get daily trade ideas) or use the contact form. We are currently offering mentoring services on both stock and options (day trading and swing trading) as well as designing a suite of custom indicators that actually work in real world trades. (If any one tells me that all these custom indicators that you pay $1000+ actually work, I can most likely prove you wrong. I have tried my fair share of them.)

May all your trades be profitable…

Lloyd (aka Joe)

 

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