The problems that come with a stock that goes down are obvious. But look at something like Roku stock and you can see that there are some different, but still challenging, problems with stocks that just keep going higher.
Swing Trading Example: Roku Stock
Roku (ROKU) has been one of the big winners of 2020 with a nearly 150% gain. With people spending more time at home during Covid, the demand for entertainment has only grown stronger. And Roku stock was already familiar to members of SwingTrader as we had three prior profitable trades on it.
Most recently in November, it joined our current trades around 239 as it cleared an area of resistance from the prior two days (1). While the relative strength line wasn’t at new highs that day, it was headed in the right direction.
Just two days later, the stock saw more than a 10% gain in a day (2). We started selling a portion, just a third, into the strength. It’s easy to start thinking of how much higher a stock can go but locking in some of the gains is also prudent.
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We sold another third of Roku stock the next day (3) after hitting our 10% profit goal from our entry. With the majority of the gains locked in, you’re afforded more flexibility in how you handle the remainder of the position.
Letting It Ride
After getting support at its 5-day moving average, Roku stock took another move higher (4). Even its first close below the 5-day moving average line didn’t look bad (5). The stock closed in the upper part of the range and showed a reluctance to give up gains.
From there it had four straight days of gains (6). At this point, we were up nearly 30% from our entry in just over three weeks. The earlier sells could spark regret, but it’s worth noting there are plenty of cases where those early sells let you escape a trade profitably when it turns south.
Roku stock gapped up another 6% the next day (7) on upbeat reports from analysts. We took our remaining profit just 2 points from the top of the day and before a heavy downside reversal in many of the leading stocks as well as the market.
The sell looked prescient when Roku stock gave up a lot of its gains. Had we not sold, we would have had to suffer a nearly 9% drawdown from our top in Roku. At the same time we saw multiple stocks from our current trades list drop quickly. Selling into strength reduced our exposure before the market reversal and left us with a healthy gain on the trade.
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