Having problems with your selling? Getting better entries can sometimes solve a lot of issues traders have with selling. Reversals and breaks of downtrends often give you a leg up on your swing trading. Then once you have a cushion, you have more options for exiting the trade with a profit. A recent trade in Carvana stock illustrates the point.
XSwing Trading Example: Carvana Stock
While sitting through a pullback is no fun, it's worth pointing out that pullbacks create opportunity. In November, many of the current trades on SwingTrader came from pullbacks and reversals rather than breakouts.
Take Carvana (CVNA). After pulling back and hovering around its 50-day moving average, Carvana stock moved above both its 50-day line and a trend line (1). The trend line simply connects at least three high points and can give you a solid indication when a change in trend to the upside happens.
On its face, it might seem counter to much of the IBD philosophy on buying on strength. Isn't this more akin to buying on weakness?
Not really. Sure, it's temporary weakness.
But these are usually stocks that are just taking a break during established uptrends. Their Relative Strength ratings are high. We're not trading the beaten down names near their lows.
Usually, the pullback will coincide with a mild correction in the major indexes as well. And our entry, like in the case of Carvana stock, usually coincides with strength coming back in and breaking the downtrend.
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Swing Trading Strategy: Early Entry And Early Exit
As usual with our swing trading, we took profits into strength. We took our first third off the position in Carvana stock after it hit a 4% profit (2). That made sitting through the weakness that hit late in the day easier to sit through.
Our second third came off a few days later when Carvana stock was just under a 9% profit (3). With just a third of the position left and a lot of gains on the remainder, it makes it easier to let the winners run a little bit longer. We aren't trying to create position trades here but keeping the stocks that are working and can help compound gains.
Our exit on Carvana stock came on an outside day that closed in the lower part of its range (4). This usually signals weakness to follow. Plus, with Carvana stock seeing resistance near the level of its old high, it seemed likely that a handle might form.
While the price increased from there, the action was a lot more hesitant and progress seemed sluggish (5). Our exit looked a lot more timely when Carvana dropped 10% in a day (6) and well below our exit.
Our early entry left the trade profitable, roughly 7.3% in under two weeks. Had we waited for a move into new high ground, it would have been a losing trade. The early entry using the trend line made all the difference.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
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