Among the paramount rules of swing trading — and really any type of trading — is the necessity to manage risk. Pruning your portfolio garden by cutting losses when they are small is one of the best ways to keep your portfolio from getting suffocated by weeds. That's why a recent trade in TT stock was easily cut without regret.
Swing Trading Example: TT Stock
Industrials started to look strong in the second quarter this year. But like most stocks they have struggled recently. Trane Technologies was among the general industrial group that saw a steady rise until its top in August (1). One thing that TT stock and many industrial stocks offered investors recently was tight action.
TT stock corrected just 7% (2) as it formed a flat base. It hit resistance around 207 in August (3) and fell one more time at the end of the month (4). Notably, the low in TT stock from the three-day pullback was at a higher level than its previous pullback. The action was getting tighter. It also held above its 50-day moving average. That was a feat that even the strongest market indexes couldn't accomplish.
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After testing the 207 resistance again, TT stock joined SwingTrader after breaking through that level on the highest volume in a month (5). It also saw a relative strength line soaring to new highs.
Parting Ways Before A Stop
We always enter a trade with a stop in mind and for TT stock, we chose the 21-day moving average, which was 203.36 at the time of entry. That gave Trane Technologies a little bit of room below the low of its entry day. It was a fairly tight stop, under 3% risk. A close below that level would suggest the trade wasn't working.
TT stock only progressed a little over 1% from our entry before it started reversing (6). That wasn't enough profit for us to consider selling some into strength. Plus, the selling just continued the next couple of days.
While at first the price action of TT stock remained in the upper part of the trading range from our entry day, that changed on the third down day (7). Trane Technologies fell at the open and kept making lows in the first hour of the trading session. The major indexes, by contrast, had gains for the day and started building on them while TT stock continued to falter.
Rather than wait for the close below the 21-day line, we exited early as the trade wasn't working out after giving it ample time. The early exit saved us from suffering another 2% in losses at the close. Especially in a choppy environment, small losses cannot be allowed to turn into big losses.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
