How do you protect profits? Here’s one way to do it on The Trade Desk ($TTD). (March 12, 2019)TTD
I want to look at The Trade Desk ( NASDAQ: TTD ) here. This is one of the stocks that we put on a Growth Stock List which is something I created about 5 weeks ago. I want to talk about how you trade this type of thing.
First of all, this is really where it was when I put it on the list; I just have this line here to remind me when I am looking at it. The question is, why do we put it on the list? Well, it has a great growth profile with respect to earnings per share and revenue and that is really what you want to see here. It was up against 150.00, which had been this prior high here, and just started to break through. So if you are buying the stock here, it is coming out of the top of the range and look at how close it is, we will just draw a box around the price action, within that box is the 200-day moving average and the 50-day moving average. This is, just kind of by definition if you are looking at that, it is really right in the middle of the average prices over the last 50 and 200-days. The 50 is essentially trading sideways, the 200 is in a nice gentle uptrend, which is encouraging, this is what you want to see.
If we were just going to boil this down to moving averages here is what you want to see: You want to see a 20-day moving average trading about like that. And you want to see a 50-day moving average doing this and the kind of doing that and flattening out. And why is that? Because it tells you what the price is doing. And, in this case, you could say if you are just a quant head you are going to say, “I want to buy a stock that is pretty close to the average price over the last 50-days and over the last 200-days too.” If I know that the stock is trading at or near the average price over the last 50-days or 200-days then really by definition I am not overpaying for the stock. I am paying an average price. Of course, if it is too far below then you can say I am getting that cheap. I am getting it cheap based on the prices that have come before. So here, kind of by definition, you are getting in at about an average price. You are not chasing the stock but you are not getting it at a bargain basement price either. So when you are buying the stock here, frankly, you have got to have some type of a stop on the trade.
One method you can use is just to kind of keep it a little bit under $130.00. In this case that trade is working but at some point, boom, the stock breaks out. You can’t have your stop under $130.00 anymore, now you have a nice profit, you have to protect that profit. So what you are doing is you are transitioning stops. You were initially buying here on the breakout and you are saying, “Well, if it is a fakeout then so be it I am buying here. I have got a stop that is 15 percent below where the entry is”, which is a horribly wide stop but, frankly, if the stock did start to reverse you would probably get out. Let’s just be honest, you would probably get out sooner than that. But you have to have some kind of a drop-dead stop and that would be it.
Then the stock ultimately moves up and now you can’t just be raising your stop here, Oh, I will just put it below the 20-day moving average because that is where the stock found support the last couple of times. That’s fine, you can do that, but for crying out loud the 20-day moving average is at $150.00, the stock is at $200.00. So you can give up 25 percent of the stock price before you even get stopped out. And worse than that you have given up 100 percent of your gains, maybe even more. You always want to be focused, not just on how much the stock would need to pull back in order to stop you out. But also, if you get stopped out how much of your profits are you giving up? And that is kind of a big deal. At some point here, and we have kind of hit this point, you have got to say I have got a nice move. I will probably be selling into this a little bit, it’s at 200.00 so whatever my position is I would probably be selling half. In fact, I just gave a video the other day about that had a good, good tactic about trading stocks for holding winning positions over earnings and the fractional way that you can hang onto some of this stock and put yourself in a position to win.
Let’s say you have sold out of some of your stock here and now you’ve got a stop that is based on this intraday low right here. If the stock were to fall back below where the stock opened after earnings, that’s when you say, “I have got to get out of this stock, it is a total fart, it is just done.” And so you would get out. But as the stock then starts to move up, you are looking at it here, you have still got your stop here and now the stock is starting to move up again. You are managing your existing position, now it is up here on the 12th. This is where it is today.
And so your stop, frankly, is still below here, just a little bit below, we’ll call it 173.50. Now let’s look and see where this is now; so if you get stopped out now that is 16 percent, you have got to raise it up. And so instead of keeping it down here start looking at this, if you keep it below 180.00, that is still kind of a loose stop here, 12 percent, but the stock has been kind of volatile but is still absolutely under accumulation. That is why a stock that moves up like this continues to go.
And by the way, don’t forget that the stock basically completed a 5-month base, it is kind of a sloppy base but it still is solid enough to support a move higher. So what we are talking about doing is, we are talking about initially keeping a stop that is down below the 50-day moving average, maybe below here. And then as the stock works in your favor go to current moves that are significant like here. A big move up, this is the line in the sand so I put my stop right there. Okay, the stock is here, maybe I am looking at $200.00; maybe I am really aggressive and I am looking at $200.00 saying, “You know what? If the stock pushes up against there and through there, I am going to buy some more.” Now you are in at a little over 200.00, the stock is at $207.00, so where is your stop now? You have raised your stop to here. If the stock keeps going pretty soon you are going to raise it to here. So you are gradually raising the stop to protect the profits that you have; just plan on keeping some stock, even if it’s 10 percent of what you initially bought, and just hang onto it, frankly, until the stock and unless the stock returns to your original purchase price. Just think of it as excess inventory.
The reason I am saying that is because this is a lesson that I have learned the hard way a few times, where I close out of my position at a really nice trade and then I look at the stock 2-weeks later and see that it is 25 percent higher and I am kind of feeling like a fool, like I should have held on to some. So try that but try elevating your stops as the stock works in your favor. By the way, never lower a stop. If the stock is moving against you do not say I will give it a little more room. Stops are to protect your trading capital on the initial trade and then as the stock works in your favor they are to protect your profits not to protect your ego.