Trader's Daily Notebook: Wedged in a Channel?

 | Jun 13, 2017 | 7:43 AM EDT
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For every silky smooth uptrend, such as the one we looked at on Amazon (AMZN) in Monday's Trader's Daily Notebook, there's bound to be a bunch of stinkers. So today we're going to look at what happens when we trade an instrument that rotates within a channel, continuously stopping out traders who utilize a volatility filter to try to hang on for the higher timeframe trend. 

iShares Russell 2000 Index ETF (IWM) -- Daily

Trading can be incredibly challenging, and I can't think of a better example to illustrate this than the past six month of trading in the iShares Russell 2000 Index ETF (IWM) . Referring to the chart above, we can see how a trader trying to stay long versus the 50-day simple moving average (SMA, in red) could have been stopped out a dozen different times between late January and late May. Even with the benefit of a volatility filter such as the average true range (ATR), we could have been stopped on numerous occasions. 

So what's the answer? 

Unfortunately, there isn't one. The best we can do is point to the early November breakout above the 50-day simple moving average, and suggest if one had bought that breakout and used a -1 ATR beneath the 50-day SMA as their stop, an exit wouldn't have triggered until mid-March. If one bought the mid-February low-volume rally to new swing highs, however, the net result would likely have been a loss. That's the unfortunate risk we take when trading. Sometimes rallies fail and our stops are hit. 

Secondary tools, such as volume profile, can provide a framework to design a trading plan around. And that's exactly the tool we've used when discussing the IWM over the past few months in Trader's Daily Notebook. But for those trying to utilize moving averages and volatility adjustments (or filters), the bottom line is that the faster you can recognize when a channel is forming, the better off you'll be. 

In looking at a chart like the IWM, the most logical first step is to acknowledge the instrument is still in horizontal consolidation. This means not trying to make haphazard predictions, generally grounded in an underlying bias, and guessing at an eventual breakout. So despite the recent rally (highlighted in green on the chart above) above the 50-day SMA on strong volume, there's probably no reason for any intermediate timeframe swing trader to consider buying the ETF until a high is well established above $142, or selling it short until it's back beneath $131 to $132. 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my Twitter feed @ByrneRWS



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