In this piece, I'd like to talk about the best way to manage a trade -- and, to keep it honest, I'll start with an example of a failed trade setup. When trades don't work out, my methodology demands that the risk is clearly defined. When a play doesn't go your way, the best course of action is taking your lumps and exiting.
In this example -- CF Industries (CF) -- we saw a standout support decision at the $211.78-to-$214.33 area. CF initially tested and held above this zone on Feb. 15.
A buy trigger then followed on the 30-minute chart, as seen above. Note that the maximum risk was clearly defined below the $211.78 support decision, and the potential reward -- if this were to play out -- was the $238 area. The minimum risk would have been defined under $214.47, the low that CF hit before the trigger fired off.
This setup failed miserably, but the good news is that the risk was defined. It's part of a good trading plan to properly manage losing trades!
With that out of the way, let's survey a trade that has begun to play out nicely: the Amazon (AMZN) setup from last week (video link). For all my trend-trade setups, I always calculate the initial upside target by taking the 1.272 extension price swing into the cluster zone. If this setup plays out fully to target 1, we should eventually see Amazon reach the $290 handle.
That said, some trade setups may never make it to the initial target -- though they may still make you some money, as has been the case with Amazon as of Thursday's close. So far, the stock has climbed $15.30 off the first price-cluster setup at the $247.79-to-$252.03 area.
Now it's time to manage any positions, as the stock is moving into an area of resistance on the flip side that needs to be cleared if this setup is to continue playing out. Be aware of some minor resistance between $267.67 and 268.40, and the very healthy resistance hurdle that will come in at $270.14 to $274.36. That latter zone includes multiple 100% projections of prior rally swings, along with the 0.618 retracement back to the Jan. 25 high.
Bottom line: Since Amazon has undergone a straight-up rally from the setup zone, I would suggest at least moving to a breakeven stop or, better yet, trailing up a stop. On the first test of a major cluster like this, the stock will typically falter and sometimes fail entirely. If you aren't willing to give back much in profit, you could use a tighter stop. For example, you could exit if the eight-bar exponential moving average crosses back below the 34-day EMA on the 15-minute chart.
Another way to trail a stop would be placing the level below prior swing lows, and there are two to consider on the 30-minute chart above -- at $264.06 and $257.90, with the second giving the trade a little more room. Again, how you trail a stop should depend on how much you are willing to give back in order to see if the stock can reach its target.
Another option is to book profits at resistance, and I personally went with that option when Amazon tested that level before a long holiday weekend! If you use a tight stop and get knocked out, remember that you can always go back in if you see a renewed buy signal. Basically, you should adjust your parameters according to your own trading personality.
My goal here is just to show you a few different ways that you could set different types of stops. You should test them out and see what works best for you!