A gap-down in Zoom stock was a big hit. But not as bad as it could have been due to swing trading rules.
News of a coronavirus vaccine with 90% effectiveness came out on Nov. 9, and the results on stocks were widely different. It was good news for the biotechs involved and beaten-down travel names but it was bad news for the work-from-home darlings of the stock market. Just look at one of the best stories of the year, Zoom stock. It begs the question: How do you handle an unexpected gap-down with swing trading? Do you sell quickly or wait it out?
A Profitable Trade On Zoom Stock
It didn’t take off right away, and we were a little extra cautious after the Nasdaq composite rose 13.7% in three weeks. We took a third off the Zoom stock position out of caution when it pulled back to the 500 level (2).
After the Nasdaq hit resistance at 12,000, we were eager to take another third off on the way up after getting profitable on the trade (3). At its peak, Zoom stock was 15.9% above our entry in just five days (4). With just a third of a position left, we were willing to give it some room. But when it came down sharply, we removed the remaining one-third position to protect our quickly disappearing gains (5). A good thing too. Zoom stock fell an additional 15.5% from our final exit.
Handling A Big Gap-Down
As the stock market roared back after the presidential election, Zoom stock showed a strong bounce off its 50-day moving average line (6). We added it again and got the expected follow-up move the next day (7). We took a third off after Zoom jumped to our 5% profit goal at the open.
Taking profits into strength is a critical swing trading strategy. Yes, you will often bemoan the profits you miss out on as the stock keeps rising and your participation is limited. But locking in some gains helps a great deal when unexpected turns happen. You can also expand the idea by going with smaller position sizes after a year of great gains. That’s also a strategy we employed by lowering our starting position from 12.5% to 9%.
With the vaccine news on Nov. 9, Zoom stock gapped down 13.4% at the open (8). It was well below any stops we had in place. Noticing the action in the premarket, we sent an alert to subscribers that we would wait a few minutes after the open to get a sense of direction. We exited quickly, and the stock continued falling. While Zoom stock did snap back intraday, it still closed below our exit.
It’s easy to approach a situation like that and try to wait it out. No one wants to be the person that sold at the lows before the stock snaps back. But protecting capital should be a higher priority than protecting your ego. If you try to wait it out, you could be faced with the difficult dilemma the next day when it goes lower (9). Now that the stock has gone down more, you can reason it must be that much closer to its ultimate low. But how much pain can you withstand in the meantime?
Even an attempted rally in Zoom stock (10) didn’t hold for long. The stock is back down below 400 and our exit price. If you trade long enough, you will most likely encounter these situations more than once. We sidestepped a big gap-down with Alibaba (BABA) recently. This time we took a hit. It’s important to learn from both situations
While the Zoom stock trade was one of the biggest losses of our four-year history, it could have been worse. Instead of a 12.5% weight, it was half that before the gap-down. The smaller starting position and early profit-taking reduced the sting to our annual performance. It’s a reason why those rules were there in the first place.
Originally posted on Investors Business Daily
Trading futures, options on futures, and forex involves substantial risk of loss and is not suitable for all investors. The use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.