How Long Do You Hold A Swing Trade?
January 27 2020 - How Long Do You Let A Stock Run In Swing Trading? By
Investors Business Daily
A key swing trading strategy is to take profits on the way up. Locking in a smaller gain quickly is preferable to sitting with a stock that doesn't go anywhere. But how long do you let a stock run to maximize your gains? In the latest stock market rally, we've seen that issue come up a number of times, most recently with Paylocity stock.
Swing Trading Example: Paylocity Stock
After a strong start to 2019, the computer enterprise software industry group had a rough middle of the year. But starting in October, the group looked to be on the rise again and Paylocity (PCTY) was among the early movers. It flattened out in December and then broke out to new high territory at the beginning of the year (1). The Nasdaq composite was also showing a strong move above the 9000 level on the same day.
The relative strength line for Paylocity stock approached new highs (2) along with the price. The trading volume also spiked (3) to the heaviest level since September. That was enough to earn it a place on SwingTrader.
A few days later we hit our 5% profit goal (4). We find that to be a good area to take half profits and used that rule again for Paylocity stock. As is our custom, we also raised our stop to 1% profit. There's no reason to let a good profit get away from you in swing trading.
Take Profits Early Or Let It Run?
Paylocity stock continued with a nice steady rise. After holding it for two weeks, we hit our 10% profit goal (5). You've got a number of legitimate options at this point. With a 10% gain in two weeks you can just take the profits and move on. Sure you might miss out on further gains, but those profits repeated over and over can create a phenomenal year. As long as you keep your inevitable losses small.
You could also let the stock run a bit more and postpone your selling decision. Using a short-term moving average like the 5- or 10-day line can help. If you get a decisive close below either of those lines, you sell the remaining shares. The stock gets held as long as it keeps rising. Or you can also move your stops up based on areas of support. Using the lows of prior trading days can be a line in the sand that keeps rising along with the stock.
The Final Decision
We had all these swing trading tools at our disposal, but in the end, Paylocity stock exited because of a bearish reversal (6). The stock was up 2.5% for the day at its peak but ended down 0.4%. That kind of action suggests weakness ahead. We also had a stock market that was quite extended and ripe for at least a short-term pullback. That is in fact what materialized. The next few days were negative and knocked out previous days' lows and the 5-day moving average. We got a better price by acting early.
Paylocity stock got support at its 10-day moving average line so far. One could argue that it still deserves a spot in a portfolio, maybe as a position trade. After all, it's still a leading stock in a leading group. That would depend on your conviction in the company. As noted in an Investor's Corner article, Paylocity also triggered a position trade sell rule. It was more than 20% from its traditional buy point in November.
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