We’ve been on a roll over at my Alpha Stocks research service lately. Even with the action we’ve seen in the markets, we’ve been able to find winning trades.
For example, I’ve written about our short trade in Pegasystems Inc. (PEGA) that took place back in May.
That stock was stair-stepping its way lower with a series of lower lows and lower highs. When it bounced up to resistance at its 50-day moving average, we sold the stock short.
We sold half of the position on the initial drop, and we sold the other half of the position as the stock plummeted a few days later for a combined return of 21.6%.
You’ve also read about our recent long trade in Permian Basin Royalty Trust (PBT).
For this trade, we bought the stock as it was breaking out above key resistance, and we took profits as it rallied higher. We ultimately recorded a combined gain on the full position of 21.3%.
In both of these examples, we “scaled out” of the position, which basically means that we sold the position in pieces.
This is a key part of my strategy at Alpha Stocks, and it’s what I want to talk to you about today…
Knowing Where to Look
First off, finding successful trades – on both the long side and short side – has a lot to do with where you look.
For example, I found PEGA on a list of growth stocks, which have been some of the worst-performing stocks this year.
These growth stocks tend to have impressive numbers, but they get slaughtered when they fall out of favor.
A stock that can climb several hundred percentage points in a year can also fall by 50%-80% in a short time. And like we saw with PEGA, they often do.
On the other hand, I found PBT by scouring the energy sector, which is showing great strength in this market.
Oil and gas is a hot sector right now for long trades, and PBT is even running further to the upside this week after we got out.
Well, we went back to the energy sector for another trade last month, and it’s already showing great results…
Western Midstream Partners, LP (WES) is a $12 billion midstream energy company that operates pipelines and processing facilities for crude oil and natural gas.
The chart shows a textbook volatility compression pattern with pullbacks shallowing from left to right.
This is a sign that supply is shrinking and the stock is being consolidated into strong hands.
The setup in WES looks almost identical to the one in PBT, and it’s even breaking out in a similar fashion given the action in the energy sector.
Now, the position is currently higher by just over 9% as of this writing. And we’ve already taken some of our gains off of the table for strategic reasons.
We entered the trade on May 23 at $26.42 when the stock was still below horizontal resistance.
Then, as shares rallied up and through that resistance, we saw three consecutive days of higher highs.
At this point, we decided to close one-third of the position to take some gains off the table and raise our stop loss.
So, why do we do this instead of simply selling the entire position all at once?
Well, the biggest reason is that using a strategy like this allows you to guarantee you will come out of the trade ahead.
You see, if a position goes my way from the get-go, I typically like to sell one-third or one-half of the trade.
This immediately locks in some gains and finances the risk on the remaining portion. If I don’t lock in some gains, I risk losing them all if the stock turns around and goes against me.
Then, I always try to raise my stop loss level to breakeven or above. That way, if the trade does indeed turn against me, I will still exit the remaining portion of the trade with a small gain.
Sure, if the trade keeps moving in my favor, I may miss out on some gains by selling a portion of my position early.
But that is a small price to pay for the peace of mind that comes with knowing you’re holding a winning trade no matter what happens next.
Join Me This Afternoon
If you want to receive an alert when it’s time to close the remaining portion of this WES trade, and if you want to see the other stocks that made it into Alpha Stocks, consider signing up for today’s LIVE training session.
As you can see, we have plenty of long ideas for the right stocks, but we’re also not afraid to go short. We short stocks and we also provide option alternatives if that’s more of your style.
And we get together every Monday for an hour-long live session so that subscribers can ask questions and get guidance about our trades.
If you’re ready to see what you could be missing out on, I’m holding a special session this afternoon in which I’ll discuss my strategy in more detail…
Embrace the surge,
Editor, Stock Surge Daily