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The best way to improve profits and success in swing trades is to have multiple factors align in your setups. In addition to the individual stock setting up properly, adding an industry group move and a market move creates the perfect trifecta for making money.
Take Diamondback Energy (FANG), a recent name from IBD’s SwingTrader. Its entry was on Dec. 20 and had all the classic signs of a winner. The breakout was strong from a base-on-base pattern, the RS line was making a new high, and the volume was 118% above average and well above the volume of the last five weeks (1).
Taking the view from a higher altitude, you also had the major market indexes recently breaking out to new highs and setups were plentiful in Diamondback’s group of oil and gas explorers and producers. What made Diamondback stand out is a stronger record of earnings growth (its Earnings Per Share Rating was at 96) and stronger long-term relative strength. Looking at a five-year chart, where groups with oil exposure had taken a beating, Diamondback had corrected much less and was hitting an all-time high. The E&P group remains 54% below its 2014 peak.
How did this winner play out? We quickly took half profits the next day at our 5% profit goal (2). From there, the stock slowed down a little but still made steady progress. By Jan. 4, we were up 10% from our entry and made the decision to hold a little longer (3). We mentioned in our trade setup that we were still using the 5-day moving average to guide our exit but could switch to the 10-day moving average line if we established more profit cushion.
The stock inched up a little more over the next few days but seemed to be stuck below 130 when looking at an intraday chart. On Jan. 8 (4), we exited Diamondback about two hours into the trading session. It was struggling to gain traction on a day where the market was flourishing. The stock rallied a point into the close, but we still exited with an average gain of 7.8% on the trade.
The day following our exit, Diamondback took a nasty 2.7% fall that sliced below the 5-day moving average line and closed just below the 10-day line (5). If we hadn’t closed the remaining position when we did, we most certainly would have left at a lower price.
It’s worth noting that the way we handled the stock was consistent with a swing trading mentality, but that wasn’t the only route available. Since the buy started with all the elements of a traditional CAN SLIM stock, playing Diamondback as a position trade was an attractive alternative, especially given some of the analysis from a longer-term perspective. In that regard, the drop of 3% off the top is a mere blip, especially with nearly a 10% profit. The great thing about the stock market is that there are so many ways to profit from a trade.
More details on current and past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available.
Industry Group Moves Reveal Stock Opportunities
Using The Market As Your Guide For Stock Positions
Swing Trading Strategies And Lessons