A key part of swing trading is taking your profits into strength. You might leave money on the table, but early sells help keep trades positive. A recent trade in Wingstop provides an example.
Swing Trading Example: Wingstop Stock
Wingstop stock was well positioned to thrive after the coronavirus stock market crash. The small footprint for the stores had pickup and delivery as part of their design. As consumer behavior shifted due to stay-at-home orders, Wingstop stock benefited. Before starting a consolidation in May (1), it vaulted 190% from its March low. When you miss that kind of move, it's worth watching the stock for another chance.
On June 19, Wingstop stock started to move again (2) and then pulled back a couple of days. After the pullback, Wingstop stock joined SwingTrader after an upside reversal on an outside day (3). Reversals have been the most favored swing trading strategy in May and June. Especially, as in this case, when the relative strength line remains at or near new highs.
Selling Into Strength With Swing Trading
Selling into strength is a key aspect of swing trading. Wingstop stock was no exception. The day after our entry, we took one-third profit (4) as the stock went above 3%. It was an early exit but it made it easier to hold the remainder when the stock reversed for the day. Taking a little bit off the table helps you keep the trade positive. The downside, of course, is that a big move will have less profit due to the smaller position.
Wingstop stock continued to pause, but on July 2 it was up nearly 6% from the initial entry (5). That was a good time to peel off another one-third profit. It also gives you more room to hold for a bigger gain as we covered in the swing trading column on Square.
Which Moving Average Is Best?
Once you've booked some profit, it's a balancing act for the remainder. A stop too tight and you could miss out on a larger move. A stop too loose and you risk losing the profits quicker than you made them. A moving average can provide a nice compromise. It's almost like a trailing stop for a stock in an uptrend as the moving average will get higher as the stock gains. So which moving average is best to use.
Since swing trading focuses on a shorter time frame, shorter moving averages are preferred over the normal 50-day moving average line used in position trades. A decisive close below the 5- and 10-day moving averages are often used since that is typically the holding period for swing trading. Many times you'll find that a break below the 5-day leads to a break below the 10-day.
For Wingstop, July 7 was the first close below the 5-day line since our entry (6). Was it decisive? It didn't seem like it at first. But then selling at the close did push it down to 1% below the line. We try not to send alerts too late in the trading session so we let it go. The next day started off promising but again faded at the close and the final position was removed (7). The next day, Wingstop weakened more and fell below the 10-day line (8). Our earlier exit got us a better price.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available.
