Few of the most experienced traders hit the high-probability trade setups regularly, in this constantly changing environment. With the market in near-constant flux and the requirement to assess sentiment, internals, and relative strength, the challenge moves toward executing profitable trades.
Prop traders need to articulate a mechanical trade plan with clear-cut arrival and departure prices. This post also details a sample trade plan using small caps and semiconductors, making related insights through one prop trader’s experience. These are two great setups to be swing trades, with an opportunity to break out in the small caps and for a relief rally in the semis.
It is exactly these high-probability setups that traders take advantage of through careful planning of entries, risk management via the use of trailing stops, and selective targeting of key levels. The following thoughts will walk you through the process of work, trade execution, and management techniques applied this week with confidence.
Small-cap Breakout Strategy
1. Recap of the last week and first configuration
For IWM, the previous week had very lucrative swing trading weeks. Mostly if one timed the bounce nicely around the 216 level, then a tremendous drop to open and the reclaim of Friday’s low gave evidence of a good entry signal. It was a very perfect trade as it played to the targets that were projected earlier in the previous week. This now sets the stage for the next phase: a breakout to proceed into the second leg higher.
2. Market Analysis
The iShares Russell 2000 ETF (IWM) shows significant relative strength as compared to other indices and is consolidating near recent highs. It could almost be said, to look at it another way, that this most recent consolidation represents another great opportunity because the price is currently situated just about in the middle zone of a hurdle at 224—last week’s resistance.
The move above this critical juncture, combined with the price continuing to maintain intra-day above the volume-weighted average price (VWAP), could provide a decent entry for a push higher toward 224.
3. Entry and Exit Strategy
Entry Use Cases
- Quick washout: Look for a quick washout, aiming to be put in with a higher low relative to Friday low early in the week.
- Extensive Hold: Conversely, if IWM should hold above this 224.50 to 225 area, and sustains its activity, then you may want to consider a breakout type of entry over the low of day.
Exit Strategy:
- First Target: One would have to look to a move to new 52-week highs as a first target to scale out.
- Trailing Stops: Place trailing stops, adjusting stops based on higher lows, while scaling out on higher highs. In this way, it is possible to protect but still maintain profits in a way that lets further upside be without headaches.
4. Risk Management
In light of the consolidation breakout strategy, it would be very important to pay attention to the general sentiment concerning the market and the market internals. Ensure that the trade is going along with the general market trend for probability. Be prepared to exit if the setup does not hold support levels or goes wrong.
Semiconductor Sector
Sector Brief and Past Trends
The largest area of this most intense sell-off, as it typically does, belonged to the semiconductor sector—names like SMH and their leveraged tools, like SOXL, were down about 40% from 52-week highs. That put the price into proximity to the 200-day moving average, and that showcases a level which has historically been a level to attract buyers and spark relief rallies.
2. Ready to Start the Next Week
SOXL is setting up for a reversal here after the recent bounce from the 200-day moving average. This will depend on breaking the short-term downtrend and basing above the 43 level. To break out above 44, it would confirm the start of a multi-day rally and offers a very good risk/reward setup.
3. Plan on Entry and Exit
Introductory Situations
- Trend Break Confirmation: Wait for SOXL to break its steep downtrend and base above the 43 resistance level. Once confirmed, enter the long on a breakout above 44, using the day’s low as a stop level.
Exit Strategy:
- Target Levels: Initial objectives would be 47 to 47.50 followed by 50, as SOXL approaches key resistance areas. A stretch goal of 52 is achievable if heavy buying pressure surges into the market, though this is subject to market conditions.
- Trailing Stops: Much the same as the small caps trade, use trailing stops based on higher lows on a 5-minute time frame or the prior day’s low, adjusting according to the momentum of the move.
4. Risk Management
Remember that with SOXL leveraged ETFs, the volatile nature puts lots of risk out there. Volume and price action will help you adjust stops; make sure you lock in gains if the move starts to lose steam. An aggressive trailing stop method protects against ferocious reversals typical with relief rallies.
Added Small Cap Ideas
Make the Liquidity Trap a Primary Focus
Small caps have been quite popular and have a real following behind them, for relatively good reason, especially after the breakout of IWM. Liquidity traps, when short catches unsuspecting shorts so that they have to cover, are the prime scenario.
- W closed strong on Friday and a high probability of a squeeze above 8. I will be watching for a reclaim of over 8 to potentially sell as it starts moving closer to 9.
- BFI: Momentum last Friday was great. Beautiful squeeze. Potential shorts setup here if it can push into the 6.00-6.50 and fail. The plan would be to short versus the high, seeing if we can get a move back to the 4.00-4.50 area.
- POI: Gave a great short last week, and alerts are going at a potential quick liquidity move back to 2.00+. A reactive short versus the HOD could offer a move back toward the low 1.00 area.
2. Execution and Risk Management
With these small cap plays, it really becomes all about being very quick once an opportunity is spotted and not having any trouble taking profits when they present. These are not swing trades; this is strictly an in-and-out intraday opportunity where you should be ready to “nail and bail.” It is all about capitalizing on momentum and reacting to shifts in market psychology.
Conclusion
While it’s obviously a good thing, the upcoming week will hopefully provide me with some small caps and at least a little bit of a semi. The two primary focuses will be on the small caps breakout in IWM and the potential relief rally in SOXL, then go to the next level of detail with trade plans/entry/exit strategies.
Plus, these short-term small-cap plays offer me some day-trading opportunities while mining traps in liquidity. By approaching those setups from a disciplined standpoint, with clear risk management and strategic execution, traders put themselves into positions where they can look to take advantage of those changing market conditions.
The probability of success requires adaptation, staying alert to key levels, and reacting quickly to market moves. Maybe you’re focused on the swing trades in IWM and SOXL, or maybe you’re attempting to take some small-cap names for quick intraday gains. The following insights should help guide you in the week ahead. Always stay nimble, manage your risk, and be ready to make those adjustments to your strategy as the market unfolds.
