Position size is a critical component of any trading strategy. Swing trading is no exception. With Interactive Brokers stock here's how we used position size to help mitigate our risk and manage our position on two different trades.
Starting Small With Uncertainty
One of the buy strategies favored in our swing trading strategy is buying reversals at pullbacks to areas of support. Make no mistake these pullbacks are not weak stocks. They are strong trends showing temporary weakness.
Take Interactive Brokers. Since the gap up from the election (1), the stock saw a strong move (2). The pullback offered some opportunities for early entries.
First, we used a reversal at the 50-day moving average line to start a half position on SwingTrader (3). We started on the tentative side because just two days prior the market had a negative reaction to a Fed announcement. While our entry on Dec. 20 showed positive action for IBKR and the market, we expected the damage might not be completely done. A lighter position is a good way to test the market strength. Using the feedback on whether your trades are working let's you know whether you can get more aggressive with sizing.
As the market stalled a few days later we quickly booked our profit (4). To be clear, IBKR didn't do anything wrong. But it got to an area of resistance. That's often a natural area for a pause and that's exactly what happened. Though we made less profit because of the smaller position, we still made progress.
Interactive Brokers Offers Another Reversal
As usual, we didn't lose track of Interactive Brokers. A few days later it had another strong reversal at its 50-day line (5). With an earlier gain already acting as a wind at our back, we went with a full position. Our entry was within a point of our prior trade's exit. We didn't give up much selling and getting back in. Even better, we didn't have to take on the risk of holding through a pullback that easily could have gotten worse.
We also decided in the new year to start positions larger in general and take our profits quicker rather than starting small and adding to them as they worked. Both strategies are valid but adding to smaller positions while simultaneously trying to take profits into strength can lead to more trading activity. The link below features a free webinar that goes into a comparison of strategies.
Want To Learn About Swing Trading? This Free Webinar Lays It Out With A Special Offer.
For both reversals, using the low of the entry day provides a good place for a stop loss. If you go below that, you know that the timing of your trade may have been off. However, for our second trade, the move down was more than we were willing to lose. So we used the low of the prior day to cut the loss a little quicker if it didn't work.
Taking Profits Into Strength
But it did work. That shifted our attention as to when to take profits. One way to gauge profit taking levels is to set straight percentages. You can also customize the targets more by using the average true range (ATR) for the individual stock. That is a useful gauge on how much a stock typically moves.
For Interactive Brokers, we took our first quarter profit when we had achieved half an ATR (6). We took another quarter profit once we got a full ATR of profit (7). Profit taking on the way up might mean having less in a position that's working. But it also means that if a stock reverses lower, the early profit taking gives you a better trade result.
When Interactive Brokers broke below its lows of the prior few days, we exited the remaining position (8).
Now the stock looks like it's finished a handle and is offering an early entry on a cup-with-handle base (9). But with earnings coming after the close on Jan. 21, we are holding off on any new buys of this stock to avoid earnings risk.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
