Being wrong is just one of the costs of doing business for a trader. But in swing trading, we try not to stay wrong for long. You can compromise entries to get into a stock, but managing risk is a place where we don't compromise at all. That's why we cut our loss early in Snowflake stock when it started going against us.
Snowflake Stock Didn't Make It Easy For Investors
When Snowflake entered the scene as an initial public offering in 2020, it quickly skyrocketed to the top of many growth stock lists. After a 75% fall over the next four years, one could have thought it was dead. But with a double in price in the last 12 months, it's back on the radar.
Snowflake stock hasn't made it easy lately. It crossed back above its 50-day moving average following the April 22 follow-through day and trended nicely above it. When the Nasdaq composite broke its 21-day line in a big way, Snowflake had a hard fall below its 50-day line for the first time in months (1). When market indexes initially started to rebound, Snowflake didn't participate. It took another hard hit (2).
Markets Can Frustrate. But Keeping To Your Rules Lets You Weather The Storm.
On a positive note, it eventually stopped going down. But it wasn't immediately rebounding with the market either and the relative strength line lagged.
An Unusual Entry
The lagging nature of Snowflake changed with its last earnings report (3). The stock flew up 20% and cleared recent resistance. But we wanted to see how well it digested the gains.
When we saw Snowflake stage an upside reversal, it joined the current trades list on SwingTrader with a half position (4). It wasn't a typical entry given the short length of the pullback. But if you come to expect a 50% retracement from a big move, Snowflake seemed to get support right around that level. We knew, however, it would be normal for the stock to come more.
Because we used an unusual entry, it was even more important to manage the risk on the trade. The low of our entry day gave us an important line in the sand to tell us if we were wrong. It made our risk 4.8% from our entry and with the half position, the risk to our portfolio was lessened even more.
Cutting A Loss Early
It's important to remember that when setting a stop, we usually think of it as the maximum we are willing to lose. Nothing says we can't cut and run earlier. Snowflake started getting some traction the next day but then quickly started losing gains (5). Rather than wait for a 4.8% loss on the trade, and it got much worse the next day (6), we opted to cut it when we were down 1.6% from our entry.
First, we didn't get the expected follow-up buying from the upside reversal. More importantly, Snowflake was weaker than most of the market. It's OK to stretch to gain a position. But it's even more critical to cut when it doesn't work as expected.
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.
