One of the hardest things to stomach as an investor is to see strong gains disappear before your eyes. You can quickly find yourself remembering where your portfolio was and waiting anxiously until it gets back up there. Of course sometimes the losses just get worse. But for swing trading, doing some selling on the way up is a key tenet that ends up protecting you from drawdowns. Here's how we applied the rule for software stocks.
Swing Trading Example: IGV
Last week's column discussed the unexpected signal of market strength that came on Election Day, before anything was decided. It wasn't just the indexes that looked strong. The iShares Expanded Tech Software ETF, also stood out as it bounced from its 21-day moving average line (1) on election day.
An attractive quality was the relative strength line hitting highs before the price on the software ETF. Plus, having cleared the long-term resistance around 90 from 2021, we were looking at few barriers to detract from the price. But we decided to wait until the election results came in to act. If the reaction was positive, we planned to ramp up exposure quickly. If it was choppy or down, we had enough of a cash position offering protection and the ability to reduce our holdings if necessary.
With the election results decisive and a strong market reaction, we looked to ETFs to start ramping up exposure quickly. We started a three-fourths position in IGV on SwingTrader as it gapped up and then added another quarter a little later in the day (2).
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The market just got stronger and IGV ramped up quickly, hitting a 5% profit goal within a couple of days.
The Benefits Of Selling Into Strength
After six consecutive days of gains, we decided to start scaling back on our position starting with a quarter trim (3). One of the hardest parts of selling into strength is watching the position go up even more after you sell. And that's what IGV did the next day as it gapped up (4).
But remember the goal isn't to sell at the top. The goal is to make as much money as you can and even more importantly keep it. Selling into strength helps a great deal with the keeping it part. But there's no free lunch. You have to be willing to sacrifice some gains in order to keep the profit you have.
Ultimately, IGV closed poorly after gapping up and we took the opportunity to reduce another quarter position. When IGV fell more the next day (5), we removed the remaining position. Our earlier sells were at higher prices and on the way up making the drawdown on IGV very slight.
As much as the first sell might have hurt as IGV gapped up, it looked much better as IGV continued to fall on Friday (6). As a swing trading rule, selling into strength is critical for keeping more of what you earn.
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.
