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Use This Backup Plan to Secure Your Profits

This could insulate you from suffering a loss on a trade…

On May 4, I wrote about the Financial Select Sector SPDR ETF (XLF).

Back then, I pointed out a bearish head and shoulders chart pattern that could’ve drawn prices lower.

Since then, XLF has indeed traded lower, and the exchange-traded fund (ETF) is still looking for support (red line) before putting in a bottom.

Given the recent action in this market, now’s a great time for an update on this trade…

Let’s go over the updated 2-day price chart of XLF below…

As you can see, we’ve neared my target of $31.13 – an important level in XLF. This is a major top from which prices broke down in February 2020.

On May 4, I wrote about how the markets have long memories, and it’s common for them to re-test past important levels like this one.

However, it’s crucial to have a backup plan that helps you manage an active trade. After all, the market could always reverse sharply before meeting this level.

That’s why on this updated chart of XLF I’ve included one of my favorite trend-following tools – the 9-period exponential moving average (EMA – green line), which I use as a trailing stop loss for XLF.

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Meaning that if prices breach the moving average – as of writing it comes in around $34 – then I’m out of the trade.

It’s a simple yet effective trade management strategy, and one that has often kept me on the right side of the trend for over the last 14 years.

Employing a trailing stop loss allows you to lock in some gains on a profitable trade, while leaving the potential for further profits to accumulate.

If the market continues to move strongly in your favor, then you have nothing to worry about.

You’ll have accumulated more unrealized gains and your trailing stop loss wouldn’t have triggered.

But if the market moves against you, then a trailing stop should insulate you from suffering a loss or giving back too many of the profits you’ve managed to build up.

In the case of XLF, the market did pierce the $34 level on an intra-day basis, but on the 2-day chart I’ve shared above, the market didn’t close past the 9-period EMA.

As a result, I don’t see a reason to give up on the initial target of $31.13 just yet.

However, if the market does manage to close past this moving average, then I would exit the trade.

Think of a trailing stop loss like an insurance… And like any insurance policy, you hope you never need it… but if the worst comes to pass, then you’ll be glad you had it.

Happy trading,

Imre Gams
Analyst, Market Minute

Reader Mailbag

In today’s mailbag, Jeff Clark Trader member Tommaso shares his thoughts…

Hello Jeff,

I’m glad I invested in this course and membership. God has been able to bless me from your course, and I’m a big fan of it. You’re kind and have a gift of translating a complicated skill into layman’s terms that most of us can pick up.

May you continue to teach for the next 40 years and more. You transfer so much confidence, and I know my trading and investing will level up this year. You are the words of a mentor that I need at the right time.

– Tommaso S.

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