Ever have a stock burn you multiple times and make you hesitate to try again? Even worse is when you finally give up, the stock works and takes off without you.
This is where keeping the losses small when a stock doesn't work can give you the flexibility to try again in case it does. It's why after getting burned on Toast stock previously, we were still able to turn it into a winning trade.
Getting Burned On Toast Stock
As Toast carved out a flat base over a seven-week period, it established 45 as an important area of resistance. On June 9, Toast hit its head on that 45 level and got turned away (1).
A few weeks later, we looked at a setup that saw an upside reversal at the 21-day line (2). It was on an outside day closing at the top of its range. We took a half position try on SwingTrader only to see the stock hit its head at the same level and get turned away again (3). We exited quickly to cut our loss. The loss was even more slight since it was just a half position.
On July 8, it looked like it was finally breaking above 45 but the breakout didn't last (4). By the end of the day it was down nearly 3%. A few days later, Toast ran into trouble again, hitting 45 then closing slightly down on the day (5).
With all the false starts, it's understandable to scratch a stock from your list in favor of a better personality. But sometimes, just when you've given up on a stock, it finally changes character. Just like the athlete that lulls their opponent into a pattern with multiple feints one way before going the other way.
The One That Worked
On July 16, despite all the previous false starts, we tried again (6). We saw another upside reversal at the 21-day line, just like we had seen multiple times before. What was different this time is that Toast didn't really lose much ground before showing the upside reversal. It was tighter action and that tends to lead to explosive moves.
Not only did we get a nice follow-up move the next day, but Toast continued to a 10% gain from our entry in less than two weeks. Normally we would be taking some profit into that strength but we started with a half position again. We didn't want to make the weight too small. We finally did trim it down when Toast hit the 10% profit level again after a short pause but got turned away (7).
It wasn't just the technical action but also that earnings were around the corner. With a 10% cushion our intention was to hold a quarter position through earnings. But Toast dropped quickly the next day and we decided to protect our profit while we had it (8). Even considering the previous loss, we came out ahead on the trade because we kept the prior loss small. It also saved us from the reaction to the earnings report for Toast that would have most likely shook us out at a worse price (9).
The persistence and willingness to observe a key difference and try again turned a losing stock into a winner.
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.
