Swing trading is not only about keeping losses small. It also requires protecting a profit when you have it.
Selling into strength or quickly cutting at short-term moving averages protects your portfolio from too much damage. That means we often don't give positions much room to drop before we exit. So what happens if the stock rebounds? That often means buying it right back.
Swing Trading Example: XLY
Last month, this column analyzed a position in the SPDR Consumer Discretionary ETF. After a solid gain from a postelection bump, we exited the position to protect our gains as it broke below its 10-day moving average line (1). Even though it was rebounding at the time of the article (2), we noted a concern with one of the larger positions in the ETF, Amazon.com, which had been lagging.
But the next trading day, things shifted and we added XLY right back on to SwingTrader (3).
It's easy enough to look at such a trade and refuse to buy a position just because it's at a higher price than you just sold. But the market is constantly giving you new information. If you don't adjust your thinking, you could see opportunities pass you by.
Mike Webster shares how he uses the relative strength line to make decisions
Using Market Feedback To Adjust Positions
Not only did we add the position back, we also made it larger once we made progress (4). In this way you get more money into what's working. We are also watching for sell signals on the way up or opportunities to sell into strength.
We had a 10% profit from our entry and a downside reversal in XLY tested our resolve (5). The low of that day gave us a potential exit close to the peak. But XLY kept going higher.
At the next reversal, however, we decided to lock in some profits and reduce the position (6). As is often the case, the ETF kept going higher (7). Though we didn't participate as much, we still retained part of our position. It was another example of the market giving feedback that the position was strong — at least temporarily.
Fed Reaction Hits Leaders Hard
Fed days can often bring volatility and this last meeting did so in spades. With a portfolio aggressively positioned bullish, the negative reaction Wednesday required cutting losses and protecting profits. We exited our remaining position in XLY at a lower price than our prior sell a few days before (8). While our upside participation was reduced, so was our downside participation when the market started tumbling.
But continuing to get market feedback remains important. As money shifted back to leading stocks of the last couple months, XLY saw a nice bounce and support at its 21-day line (9). It gave us another chance to buy the position back on the upside reversal. Now with our entry day low providing a clear area where we can get feedback if we are wrong, we have a low-risk entry with a lot of upside potential. All because we are willing to buy positions back.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
