Last month, we netted an 11% gain on a swing trade in LinkedIn Corp ($LNKD), which we held for approximately two weeks (15 trading days). In this trading education article, we explain exactly how we did it by reviewing the annotated technical chart pattern that prompted us to enter the trade, then concluding by explaining the technical criteria that told us it was time to sell and lock in the profit on this stock pick.
For all our stock and ETF trade entries on the long side (other than trend reversal plays), we must first verify there is already a well defined uptrend in place before buying. This ensures that bullish intermediate-term momentum is in our favor, which dramatically increases the odds of a profitable trade.
Although the stock pulled back from a high of $125 in September of 2012 to a low of $95 in November, $LNKD had already rallied more than 100% during a preceding ten-month advance. As such, the $30 price retracement off the September high equated to just a 24% pullback (which is about the maximum percentage pullback we like to see).
Once we establish that the stock is already in a strong uptrend (here is how we specifically do that), we then look for a bullish base of consolidation to form over at least the next five to seven weeks. $LNKD did exactly that, as it formed a 15-week base from September through December of last year.
The next step before attempting to establish a low-risk buy entry in a stock that is basing out is to ensure the price action has begun to show signs that bullish momentum has moved back in our favor. This is accomplished by looking for the formation of at least one "higher low" to form within the base.
As annotated on the first chart below, notice that $LNKD formed a higher low in late November of last year, as it held above the $105 level. Once that higher low is in place, we then start to look for an ideal buy entry point (if one develops).
On January 8, after four weeks of consolidation above near-term support of its 20-day exponential moving average, $LNKD closed well off its low of the day, after "undercutting" its prior low from January 2. This presented us with a a low-risk entry buy entry point above the $113 level (which was simply a rally above the intraday high of January 8).
That night, we provided our exact and predefined entry, stop, and target prices to subscribers of our Wagner Daily end-of-day trading newsletter. The following morning, $LNKD triggered our buy entry by rallying above $113. Below is a snapshot of the daily chart pattern as it looked the day before our swing trade buy entry:
Our preset buy stop triggered on the morning of January 9, and we were long at an entry price of $113.30. Our initial goal with this short-term stock pick was to hold $LNKD for a quick pop, and then sell into strength ahead of its upcoming quarterly earnings report. The momentum of the swing trade immediately began working in our favor, as $LNKD gapped sharply higher on January 10, just one day after our buy entry point, and held firm.
The strong breakout of January 10 was accompanied by a burst of volume, which attracted plenty of additional buying interest. As such, $LNKD continued pushing higher over the next two weeks. After two strong up days that came two weeks after our entry point, we decided to raise our protective stop after the close of January 28 to just below the $126 level.
The tight trailing stop we set allowed us to still participate in further upside gains if $LNKD continued moving higher, but also protected nearly all our profit in case the stock took a breather and its price reversed. The next morning (January 29), $LNKD triggered our stop just below the $126 level, enabling us to lock in a solid 11% gain on a 15-day momentum trade hold ahead of earnings. The price action subsequent to our entry point, as well as our eventual exit, is detailed on the chart below:
Obviously, not all trades are winners that work as smoothly as this $LNKD trade. However, that's why we always set predetermined protective stops immediately at the time of entry. This ensures that our losses are limited if the trade does not move as anticipated. To be a consistently profitable trader, one only needs to make sure the winning trades are larger than the losing trades.
Over the course of the 11 years we have been publishing our stock newsletter, we have always aimed for a reward to risk ratio of at least 2 to 1 for each trade setup (meaning the average winning trade is twice the size of the average losing trade). When using strict money management rules such as this, one can still generate consistently profitable long-term returns, even if the winning percentage of overall stock picking is not very high.
We hope you learned a few new things from this article, as we really enjoy sharing our proven, rule-based stock trading strategy with individuals who are serious about learning trading. Be sure to check back on our trading blog frequently, as we will soon be reviewing more actual swing trades we have recently provided to our subscribers. We will even be reviewing a "breakaway gap" momentum trade setup in which we recently re-entered $LNKD on the morning of its recent earnings report, but we first need to wait until that winning trade is "officially" closed.
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