Risk in swing trading is often misunderstood. The idea of frequent trading for smaller profits per trade might seem like there isn't enough gain to justify the potential pain. However, that overlooks the risk-reduction benefits offered by swing trades. What if you could take nearly the same gains with less pain?
Taking small profits helps avoid corrections or even long periods where a stock doesn't make progress. Every day you own a stock adds risk of unforeseen events causing a loss of capital. Own a stock for fewer days and you've already reduced your risk. If you can capture the bulk of gains in those fewer days, even better.
Take Square ( SQ ), a stock that has been on IBD's SwingTrader multiple times this year. When it was added July 11 at 25.07 (1) , it quickly made a 5% gain. We took half profits the next trading day (2) and the stock inched up from there, riding its five-day moving average line.
It was nearly at the 10% profit level when it sliced through the five- and 10-day moving averages intraday. In order to preserve profit, the remaining shares were removed (3) to keep the final result on the trade at 5%.
While the stock did hit its 10% profit level a couple days later, it quickly retreated after that and formed a base over the next 34 trading days. Being out of the trade avoided a lot of potential pain without gain. We didn't sit on dead money. And while the correction was mild at just over 13%, the breach of the 50-day moving average in a weakening market could have easily shaken you out near the lows of the base.
What's more, the money from selling Square on July 24 was available to put into Cadence Designs ( CDNS ) on July 25. Cadence Designs provided a 1.2% gain in just a couple days.
After sitting out the base, Square was put on SwingTrader again on Sept. 7 at an entry price of 26.50 (4) right around the exit price seven weeks prior. It was played in a similar way by taking half profits at 5% a few days later (5) , and finally removing the remaining shares to preserve the 5% profit as the stock fell below its five- and 10-day moving averages (6) .
From the original entry (1) to the last exit (6) , more than two thirds of the gains were captured by holding the stock only one third of the days, and most of those with only half the position.
A final point: The proverb "familiarity breeds contempt" doesn't usually apply in trading and certainly didn't with Square. Keeping past winners on your radar opens opportunities for future profits. Nothing sharpens your attention to a stock's personality like having money in the stock. And that familiarity can help in future trades - and breed profits.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.