Before entering a trade, it's important to have your risk level identified ahead of time. How much are you willing to give up for the potential of a gain? A recent swing trading example with STNG stock didn't work out. But cutting the loss quickly saved us from further losses.
Trends Not Lasting Long
One of the biggest challenges of the current market is that trends aren't lasting long for many stocks. From the October bottom, the Dow Jones Industrial Average outperformed. Then in January, it switched to growth and the tech-heavy Nasdaq composite led.
As we rolled into February, the energy transport stocks took control. Scorpio Tankers was among the leaders. On Feb. 7, STNG stock had a strong move back above its 50-day moving average line that broke a downtrend (1). Volume also picked up on the move.
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But there was another factor plaguing stocks in February: earnings season. The earnings report for STNG stock was just over a week away, making an entry more risky.
Even though the reaction to earnings was positive for STNG stock (2), the next day saw a reversal and the beginning of a pullback (3).
An Entry For STNG Stock
The pullback in STNG stock seemed orderly and got support at its 21-day moving average line (4). On March 7, we added it to our watchlist as it followed up on the bounce, but volume was a little light (5).
The following day, STNG stock clearly broke its downtrend and we added it to SwingTrader as volume confirmed the price action (6).
As always, we entered with an exit plan in place. A break below the high of March 7 would put STNG stock back below the 10-day line and the downtrend line. From our entry, we were only risking 3.1% on the trade. At a position size of 9%, that's just over a quarter percent risk to the portfolio if exited at that price.
Keeping The Loss Small
Unfortunately, STNG stock was a trade that didn't work out. But fortunately, we kept our loss small as it reversed on March 9. It was a rough day for markets, with SVB Financial dropping 60%. Rather than excusing the behavior of STNG stock or rationalizing that it was in a different industry, we took the loss because it triggered our exit (7).
In retrospect, it was a good decision. The tankers came down as a group and kept getting worse. A move up to the short-term moving averages on March 14 didn't last long (8). If we waited to see how it played out, our loss might have been closer to 15%. That kind of damage in a stock transfers over into greater damage to your portfolio by taking another whole percentage point away.
Better to take the small sting early rather than risk things getting worse.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
