One of the best ways to avoid taking large losses in your stocks is by taking small losses. It's too early to say definitively, but VRTX stock may be another proof point of the rule. Cutting losses quickly is even more important with swing trading.
Swing Trading Example VRTX Stock
Vertex Pharmaceuticals had a lot going for it in this latest rally. But like most stocks, it wasn't perfect.
The base that started in April (1) corrected just 20% to the low of the base (2). That's not excessive, and in a market with many growth stocks down over 70% from their peaks is fairly mild. By the time VRTX stock moved above its 50-day line and started to go sideways in a handle formation, the relative strength line was already at new highs (3).
On May 31, a big outside day closing at the lows on heavier volume was a flaw to the pattern (4). But overall, Vertex held its ground above the 50-day line while volume came in well below average.
Swing Trading Entry
When VRTX stock joined SwingTrader on June 8, the volume wasn't as heavy as May 31 but it was tracking much heavier than the prior week (5). Meanwhile, the relative strength line nearly made new highs during the day, but the weak close left both the price and relative strength line below the May 31 levels.
Rate hikes, recession fears and the opportunities that may come are discussed on this week's podcast.
Those negative signals aren't deal breakers. But it helps to be objective in your assessment of a stock, navigating between the good and the bad.
Regardless of how many points are tallied in the positive column, you still need an exit strategy in case the trade doesn't work as planned.
Always Have An Exit Strategy
For VRTX stock, using the entry day low was a little too tight. Stops that are too tight increase the chances you get shaken out in a normal wiggle in stock price. Instead, we used the low of the day prior to the entry as a stop loss. That also happened to coincide with the 50-day line.
We generally don't use a hard stop or stop loss orders for trades. Generally we prefer to see how a stock acts at the support level. Does it breach it briefly and rebound? Or does it continue lower and pick up speed to the downside?
We ended up exiting VRTX stock the day after our entry, ahead of our stop in this case (6). Why? Breakout failures started piling up. Some failures were more spectacular than others, like the 20% drop in group mate Amphastar Pharmaceuticals.
After we noted weakness at the open, VRTX stock rallied briefly and then went on to make new lows for the day. At the same time, the market indexes were breaching prior levels of support. Our conclusion? Take the small losses before they get larger.
Our exit on VRTX stock was at 267.22, just a 3.5% loss from our entry. It's easy enough to recover from that kind of drop. Especially since our light exposure this year is providing a large gap of outperformance over the S&P 500.
The stock closed at 259.70 at the end of the day, with volume even higher than our entry day volume (6). That's almost another 3% drop from our exit. Then it got even worse on Friday.
Sure, for VRTX stock this could just be part of a longer handle. It could turn around immediately. But it could also get worse and that's what our quick exit is protecting us from.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
