There’s a lot about swing trading that is an odds game. Following rules is important for long-term success. However, those same rules may frustrate you on a short-term basis. Crocs stock shows a good example of a stock that got away though our sell decision was sound.
Getting To Know Your Stock’s Personality
Crocs (CROX) is one of those rare former leaders that rises from the ashes to lead again. It’s had a strong run from the coronavirus crash and the latest surge for Crocs stock came after its last earnings report (1). After rallying for just under a month, CROX stock started another consolidation (2).
Getting a sense of a stock’s personality before making a trade is a good practice. A weekly chart of Crocs stock shows that it has respected its 10-week moving average line since May 2020. That kind of behavior can suggest future swing trading entries.
With that knowledge, Crocs stock joined SwingTrader on Sept. 8 after finding support at its 10-week and 50-day moving average lines (3). Adding extra conviction to the buy was the volume behind it (4). It was the heaviest volume in CROX stock since its last earnings report.
Following Swing Trading Rules On Crocs Stock
Crocs stock acted as expected with a quick follow up to its 50-day bounce. In just a couple of days, we already had a more than 6.5% gain. As we like to sell a portion into strength, we took a third of the position off to lock in some profit (5).
It would be normal for a stock to pullback a little after such a strong run.
Crocs stock, in contrast, sliced below its 5-, 10- and 21-day moving average lines (6). Given that it didn’t have much room above the shorter-term moving average lines, maybe that could be forgiven. But the volume also increased above the volume of our entry (7).
Even worse, Crocs also squandered the solid gain and traded below its entry. That’s a swing trading rule that we don’t want to break by letting a strong gain turn into loss.
Process Over Outcome
The next day, Crocs continued to look fairly lackluster but started moving up quickly in the second hour of trading (8). Crocs announced a share buyback and highlighted positive sales forecasts during their investors day presentation. At one point, Crocs stock was up 14.5% for the day. Volume swelled, too (10). It was well above recent action and even the volume of the last earnings announcement.
In retrospect, our swing trading rules seemed foolish because of this outcome. The exit robbed us of a huge gain. But we continue to stick with our swing trading process. Why?
It’s an odds game. You will have your anomalies in the short run. But by keeping our losses small and not letting profitable trades go negative, we stick with a winning strategy in the long run. But it’s not the only strategy. A position trader could easily justify holding the stock using a different strategy as an exit. Namely the 50-day line. They can afford to give a stock more room as they go for the bigger gains held over a longer period of time. The strategy you use will dictate your rules, whether swing trading, position trading or even day trading.
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