It's been a powerful market rally from the June lows, but have we gone up too much too fast? That might not become clear for a while. In the meantime, we are sticking with our swing trading strategy of taking profits into strength. VRTX stock is a recent example with some additional lessons to the trade.
Stock Ideas May Not Work The First Time
A recent trade in Vertex Pharmaceuticals offers a few lessons in swing trading. First, VRTX stock was the subject of a previous column on cutting losses short.
An entry on SwingTrader in early June (1) quickly failed the next day (2). By cutting the loss on VRTX stock quickly at 3.5%, we avoided an additional 9% drop in the stock over the next week (3).
While it eventually came back and then some (4), a hesitation in taking the small loss would have most likely led to an even bigger loss. You can avoid big losses by having a willingness to accept small losses.
Though that trade in Vertex stock didn't work, it didn't mean the stock didn't have potential. Plenty of times it's a case of right stock, wrong time.
After consolidating a few weeks, VRTX stock found support around its 50-day moving average line and bounced strongly with accompanying volume (5). We added it back to SwingTrader as it surpassed the highs of the prior three days. It looked to have a lot of upside potential and a stop loss below the entry day low risked less than 3%.
Scott Bennett of InvestWithRules.com shared his data on billion dollar fund movement and Vertex stock on IBD Live
There were other bounces from moving average lines that looked promising along the decline. But it was either from shorter-term moving averages, like the 10-day line, or without much volume behind it. We also had to contend with a looming earnings report that came out just prior to our reentry.
By the end of the day, we already had nearly a 3% gain from our entry. Our willingness to try VRTX stock again paid off.
Taking Profits Quickly In VRTX Stock
Once you have a cushion in a stock, it opens up more options for your trading. Our swing trading strategy gravitates toward taking profits quickly into strength. We consistently apply the rule early for at least a portion of the position. After that we can give a stock room as long as it doesn't get too far extended or break below short-term moving averages or areas of support.
For VRTX stock, we took a third of the position off the day after our entry with a 3.5% profit (6). The following day we had a 7% gain from entry and took another third profit (7).
With the majority locked in and a profit cushion, the remainder could be turned into a position trade. The rising 50-day line could effectively act as a trailing stop as the stock went up.
However, we keep our losses and drawdowns smaller with swing trading. When VRTX stock retraced the gains of the prior day we didn't take any action (8).
But on Aug. 11, we exited as Vertex stock took out the lows of two days prior and looked to close below its 5-day moving average (9). We might have allowed more room, say to the 10-day line, but the market indexes are looking extended as are many stocks. The end result was a 5% gain for the trade in just one week's time.
Even more important, nothing prevents us from buying it back if another setup presents itself. It might not be the last we see of Vertex stock.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
