It's inevitable that stocks will pull back at some point during their uptrends. Or at least go sideways. A swing trading strategy helps reduce drawdowns by sidestepping those periods as much as possible. A combination of selling into strength and tighter stops help make the strategy work.
But you have to sacrifice something. In this case, the large gains achieved from holding over time aren't frequent in swing trading. But your portfolio can still do great with smaller gains compounded together. A recent trade in Cathie Woods' ARK Innovation ETF illustrates our strategy.
ARKK Gave A Solid Gain In June
Early in June, ARKK broke out of a short flat consolidation in what looked like a solid entry (1). Though we missed that opportunity, ARKK joined SwingTrader a few days later on a pullback and upside reversal (2). While we added and trimmed along the way up, we didn't exit the position until we had a sizable gain from an initial entry of 62.40 to 69.14 as our final exit (3).
At our exit, we noted the stalling action around 71 that led to us taking profits while we had them. Though there was some temporary weakness, ARKK held up well. It held above its 10-day moving average and showed no more than a 4% correction.
Just over a week later, we were right back in the position as it started to move above that previous stalling area (4). Yes, we were buying it at a higher price than our exit (71.15 vs. 69.14) but there were benefits to the strategy.
If a correction had ensued, we would have given up very little from the top of the trade. Even if the stock didn't pull back but went flat over a few weeks, we would have minimized our risk. Not having exposure when stocks go sideways lets you either save that money for a new opportunity or protect yourself from downside risks by sitting in cash. But it means that you must be willing to enter back into a position, sometimes at a higher price, when the chart action suggests a return of strength.
Swing Trading Strategy: Returns On Top of Returns
While we usually will take some profits as soon as we make progress on a position, we handled this second trade on ARKK differently. When we got follow-up strength, we leaned in heavier by adding a half position (5) making it more like a 15% position instead of our normal 10% full position.
That requires some careful trading. A larger position can mean pullbacks hit harder. While we try to keep a core position, we will at times trade around the position.
For instance, in this case with ARKK, we trimmed the position a few days later on a downside reversal (6) and locked in some profit. The expectation is for weakness to follow. However, when the weakness didn't materialize, we added back some of the position the next day (7).
Swing trading is a more active style of trading, but it can help keep you in tune with the market.
Exiting The Trade
One of the concepts of swing trading is not overstaying your welcome. After two back-to-back gaps up, we started trimming our position again (8). We were finding that it was getting harder to reenter positions after exiting so we were trying to keep some of our positions a little longer.
But when ARKK undercut a week's worth of lows (9), we exited the remainder. We fully expected to potentially reenter the position soon after. But the damage done to the market on Thursday's downside reversal and Friday's plunge suggests we may need some recovery time.
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.
