The 5-Day Moving Average: Swing Traders and Smart Exits
A Fed-induced rally sent stocks dramatically higher in the second half of trading on Tuesday. The Dow closed higher by more than 4%. The Nasdaq and S&P 500 were up more than 5%.
Of the three stocks mentioned in yesterday’s column (“Doctor, Doctor! 3 Drug Stocks for Swing Traders”), all three are higher as of Tuesday’s close, dramatically so in the instances of both Salix Pharmaceuticals
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PowerRating), which gained nearly 8%, and NPS Pharmaceuticals
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PowerRating), which added more than 8%. The third stock, Questcor Pharmaceuticals
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PowerRating), was higher by just under 2%.
It is important for short term stock traders who may have taken positions in any of these stocks not overstay any welcome. These one-day moves in SLXP and NPSP are nothing to sneeze at and any one who took advantage of these positions should strongly consider taking at least some profits off the table.
Swing traders using Short Term PowerRatings can use a variety of techniques to let them know when profit-taking time has come. But one of our favorites has been and remains the 5-day moving average exit.
How does the 5-day moving average exit work? Simple. Once we are in a stock trade, say to the upside, we wait for that stock to close above its 5-day moving average. We exit either on that close or on the following morning at the open.
Of course, in order to take profits when a stock closes above its 5-day moving average, a trader needs to be buying when that stock is below its 5-day moving average. In other words, you need to buy low in order to use this exit strategy to sell high.
Look at charts of both SLXP and NPSP. Not only did they make impressive moves on Tuesday, as their high Short Term PowerRatings suggested they might. But also these two stocks closed above their 5-day moving averages. Selling those stocks here allows a swing trader to exit on strength, to put merchandise up for sale when there are eager buyers lined up around the block.
QCOR has not yet closed above its 5-day moving average. This means, Tuesday’s gains notwithstanding, a swing trader could continue to manage this position, looking for the opportunity to close the trade out as soon as QCOR closes above the 5-day moving average.