Recently, we locked in an average share price gain of 23% through buying and selling shares of NXP Semiconductors ($NXPI), and we are still long one-third of the initial position as well.
As always, a few valuable lessons and tips from this trade can be added to your trading arsenal, so let's take a simple, objective look at why we bought $NXPI in our nightly stock picking newsletter, and what was learned from it as well. Read on...The Setup
At the beginning of the year, $NXPI first caught our attention after following up an impressive 40% rally (from late 2014) with a period of price consolidation above its 50-day moving average.
As January progressed, the price action tightened up a bit more, causing the semiconductor stock to oscillate in an 8% price range, while still holding above key support of its 50-day MA.
On February 6, $NXPI tested the high of its band of consolidation by probing above the $82 level on heavier than average volume.
Two days later, the stock formed a tight inside day on lighter volume, giving us a pretty low-risk entry point based on the bullish price and volume action of February 6.The Buy Entry
After forming the inside day, we listed $NXPI as a potential buy entry in the Watchlist section of the February 11 issue of The Wagner Daily.
Specifically, we told subscribers we were placing a buy stop to enter the trade on a move above the high of the February 10 inside day.
The daily chart below shows the actual trade setup at that time:
As anticipated, $NXPI triggered our buy entry that day and subsequently cruised 6% higher before stalling and waiting for near-term support of the 10-day moving average to catch up to the price (which it did on February 23).
As shown on the following chart, $NXPI gapped sharply higher on a news-driven move that occurred on March 2, then again traded in a tight, sideways range while waiting for the 10-day MA to catch up (which occurred on March 12).The First Exit (27% Gain)
On March 23, the stock showed its first sign that a potential short-term pullback may be around the corner by forming a bearish engulfing candlestick pattern.
As such, we made a judgement call to lock in some profits by selling about 1/3 of the position size the following day (March 24).
On that first exit at $104.83, subscribers who followed the trade setup netted approximately a 27% gain.
On the chart below, notice how a touch of the 10-day MA (dashed blue line) perfectly acted as near-term price support several times after the initial February 11 breakout:
The Second Exit (18% Gain)
After locking in profits on partial share size, we tightened the protective stop to protect gains on another 1/3 of the position size.
On April 6, $NXPI gapped down on the open and clipped that stop (beneath the April 1 low), enabling us to lock in an 18% price gain on the second third of the position (sold at $97.65).
The second exit is shown below:
As of today (April 15), we remain long the final third of the position with an unrealized gain of about 20%.
From here, the plan is to buy more shares with another low-risk entry of a pullback to the area of the rising 50-day moving average (currently just below $95).Top 3 Takeaways
There are a few great tips (mini lessons) to be learned from this trade review, which will surely help to increase your profits in any stock trades you make in the future:
- On high-momentum stocks that have broken out and then enter into a sideways consolidation pattern, the 10-day moving average is a simple, yet highly reliable indicator to help determine when the stock may be ready to resume its ascent.
- When sitting on a winning stock, patient and disciplined traders are rewarded. Although we bagged a 27% gain on the initial exit of one-third of the position, realize that its required the patience to hold the trade for six weeks.
- Proper trade management is nearly as important as picking the right stocks. $NXPI is just one of many stocks that have zoomed sharply higher in recent months, but even traders who picked one of the right stocks could still have easily realized a much smaller gain (or possibly even loss if the timing is wrong). That's why we always provide exact and updated entry, stop, and target prices for each trade setup in our swing trading newsletter; picking a winning stock is one thing, but knowing the right time to buy and sell is a whole different ballgame.
Overall, perhaps the biggest tip for newer traders (and a reminder for experienced traders) is that losing trades should always be dumped quickly and without hesitation, but winning trades should always be held until price action gives a valid reason to sell.
As long as the price action of $NXPI remains bullish, we will continue to hold (and possibly add to) the remaining third of our position that is currently showing a 20% unrealized share price gain.
This article first appeared at MorpheusTrading.com
Disclosure: The author is long NXPI.