On Thursday we had shares of Western Digital $WDC on our swing trade idea list. The daily sheet showed that we wanted to “buy above 5804 w stop of 5639, raise the stop quickly once the stock is above 5850.” The trade was explained in much more detail (as always) in the video.
Let’s examine this trade further with the 2 minute chart below.
At point 1 on the chart, we see that the stock opened for trading at a price of of 5798, which was 50 cents above the prior day close. In keeping with our “do not chase stocks on the open” it was not really a good idea to purchase the stock.
Everyday on our spreadsheet, the reminder is there not to chase gaps.
If you did purchase the stock, once the stock moved past 5850, the stop should have been raised, generally a safe place to raise it at that time is to just below the low of the day, in this case, the low at that point was 5787, so the stop should have been raised to 5785 (see point 2.)
In the chatroom, I was asked about where to raise the stop and I replied that I would put a stop on half the position at 5857 because I didn’t want to see it make a lower low below the declining vwap (see point 3.) When the stock breaks a lower low below a declining vwap it indicates the buyers enthusiasm has waned and sellers had taken control of the trend at that point in the day. We had no way to know that the stock would close near its low, but it did stay below a declining vwap for the rest of the day.
In this situation there are three reminders.
1- We do not chase gaps
2- If we break rule 1, then we need to be more aggressive in our management of the trade.
3- Risk management is ALWAYS job #1!!!
It is possible that we will revisit WDC for a new swing entry as the daily chart is constructive, but we want to be in a position of strength from the onset of a trade and cash looks better than WDC at this point.