Cut your losses early and let your profits run
Before trading, always have a trading plan.
Our swing trading plan:
Transaction entry with 2 units
- Suggested stocks belong to the investment universe (fundamental criteria).
- Stock price must stand above its 20-day moving average.
- 20-day moving average must have a positive slope.
- A calibrated oscillator must be in oversold territory, which indicates the likelihood of a price recovery.
- A modified MACD type indicator must not perform a bearish divergence which might indicate the end of the upward trend.
- There should be no earning release in the next 10 trading days as it can generate an important adverse gap.
- Stock is purchased if it takes previous day’s high after a retest of its 20-day moving average.
- Two units are open, they will get closed at different moments.
Unit 1 exit rule
- When the oscillator performs a bearish reversal, stop of unit 1 is moved under previous day’s low and trailed until exit.
Unit 2 exit rule
- When the 20 day-moving average is retested, stop of unit 2 is adjusted under previous day’s low.
Tools and illustrations
FIG 1: A series of buy signals with successful retests of the rising 20-day MA while oscillator was oversold (under 25). Multiple stop adjustment of unit 2 could be performed after each retest.
FIG 2: The modified MACD indicator makes a bullish divergence in A, which activates a green light for a following buy signal. However, the bearish divergence in B unauthorizes an imminent purchase.