Today’s Trade Setup On The IWM – Long In The Face Of Fear

September 30, 2014 0 Comments

Another perfect setup on the IWM that I want to share. As traders we look for low risk / high reward setups and it didn’t get much better than this today. On Thursday we had a $TRIN reading above two, so a bounce in the markets was expected. (I will be doing a post on the $TRIN at a later date.) We got a bounce on Friday and I was expecting one today as well. What a gap down we got at the open. What was sweet about the gap down was that it was at not one but two support zones. We had a gap down into an S2 pivot and at previous daily support level. Let’s analyze the risk/reward of going long in the face of fear. The risk is we are wrong and IWM breaks support. We know that right away. Our losses will be small. The reward is that we are right and IWM fills the gap. This is something that I teach every day. Find low risk / high reward setups. Never take a setup just to take a setup.

Let’s take a look at the 5 min chart of IWM –


We opened at 109.82 and sold off a whopping 10 cents before rallying. There are so many ways this trade could have been played. The first is to go long at open with a tight stop at the support levels (remember we had two levels). The next is to trade off the opening five minute candle. This is one of my favorite strategies as it is a low risk / high reward setup to catch the early moves in the market. The third would have been to take the buy off the custom strategy that I am using. That gave a buy at 110.15 and gave a signal to scale out at 110.44 and exit the remaining position at 110.65. No matter which system you would have used, you would have captured a move between 49 cents and 82 cents all in less than one hour. Using options or a leveraged ETF you would have made even more.

The automated buy/sell signals that we are using on IWM are nailing the moves almost every day. I will be running some back tests later tonight; but I believe it was giving accurate signals 8 of the last 10 trading days. I will share those results in a later post.

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