With the market in a solid uptrend, it's not a bad idea to let your stocks trend along with it.
To a degree that means we are doing more defensive selling to protect profits over offensive selling, where we sell into strength. Booking stock demonstrates.
A Constructive Digestion Of Gains
After the April 22 follow-through day Booking Holdings was one of the first stocks to get above its 50-day line. It was looking at nearly a 40% gain from its low to its June 5 peak (1).
It only corrected 7% from that peak and finished with an upside reversal that didn't even touch the 50-day moving average line (2). A mild digestion of gains can often be a setup for another move.
As Booking followed up on its upside reversal with a move above its 21-day exponential moving average, it joined SwingTrader as a half position (3). We were using half positions as one way to reduce risk in our individual stock holdings. Another way to reduce risk was to make sure we included stocks like Booking that had a lower average true range (ATR). Too much heat in the portfolio can make it harder to manage.
Protecting The Profit
We like to make progress fairly quickly once we enter a position and Booking delivered in that regard. Two days after our entry (4), we were already at a gain of over one full ATR, a place that we normally like to book our first profit. However, since we started with a half position, we held. If your position size is too small, yes, you've managed risk. But you've also limited your upside potential for when you do get a big winner.
How A Rules-Based Approach Helps This Portfolio Manager Handle Risk
A few days later, we were sitting on more than a 5% gain (5). Since we started many of our individual stocks with half positions, it shifted our strategy from selling into strength to protecting profits once we have them. More defensive selling over offensive selling.
With this approach, moving average lines make for an easy way to naturally allow your stop to rise while giving a stock enough room to wiggle around.
You could also use levels of support from upside reversals as new levels to raise your stops. When Booking had a small two-day correction with a small upside reversal, that became a level for a raised stop (6).
Someone's Got To Be The Low
After another move to highs, Booking saw a downside reversal (7). We still gave it room as we were above our raised stop but the rallies were getting weaker.
Booking came right down to the stop at 5,640 a few days later and we exited the position (8). That ended up being the low of the day (someone's got to be the low!) But somewhat heartening is that Booking ended up falling further the next day. Our exit was still a better price than if we had waited.
As usual, we are keeping this on our radar as it skirts its 21-day line. It could be ripe for another setup.
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.
