How To Keep A Trade Profitable Before It Flips

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The Nasdaq composite had a powerful rally from its March 14 low and we have a working follow-through day for the market indexes. But the past leaders in technology aren’t where the major action is. Here is why swing trading AMD stock was short-lived.




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Why We Went With A Beaten Down Stock

Advanced Micro Devices (AMD) had a 10-fold increase over a three-year span but it hasn’t been easy lately. Since its November top, AMD stock has tried multiple times to get back above its 50-day line (1) after dropping 40% to its Jan. 28 low (2).

With this last follow-through day, it seems as though much of the power from the rally came from the most beaten-down stocks. But one thing AMD stock had in its favor was that its Jan. 28 low held while the Nasdaq composite made lower lows on Feb. 24 and eventually March 14.

For as many times as AMD stock couldn’t seem to muster enough power to challenge its 50-day, when it got turned away on March 21, it seemed different (3). Rather than resuming its downtrend, it traded tightly over the next couple days (4).

AMD Stock Breaks Its Downtrend

On March 24, semiconductor stocks were collectively moving higher. We added AMD stock to SwingTrader as it launched above both its 50- and 200-day moving average lines (5). However, using the low of our entry day as our stop was a higher risk than we desired at over 5%. So, we adjusted our position size down to three-quarters. Rather than skip a trade, you can always manage your risk with a smaller position to protect your portfolio.

After a pause around 120, AMD stock started powering higher again (6) as the Nasdaq composite moved above its early February highs around 14,509.

There was an element giving us pause. The Nasdaq composite was also facing potential resistance at its 200-day line. And the nearly 17% rise it saw in just two weeks was nearly vertical. It seemed a pause would be in order.

Keeping The Trade Profitable

The next day, we had over a 4.5% gain from our entry in AMD stock and we took off a third from our reduced position (7). That was very close to the highs of the day.

By the last hour of trading, AMD stock was an outside day that looked like it would close near its lows. The Nasdaq composite was also looking weak as it undercut the previous day’s lows.

We decided to exit the remaining position as it slipped below our entry price. From a 4.5% gain at the start of the day to a loss was too weak to justify keeping.

While our final exit on AMD stock was below our entry, the early profit-taking kept the trade positive.

What’s more, we avoided an 8% drubbing the next day after AMD stock received a downgrade from Barclays (8). Though we had no way of knowing that news would be coming out, the change in character and warning signs in the index helped us avoid a big hit.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.

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