FedEx (FDX) was not on my trading watchlist or radar. On the morning of December 18th, it had my complete attention. Financial headlines were shouting about FedEx’s big drop in share price. A lower than expected earnings report and a reduced earnings outlook for 2020 were primary contributors. Leaders at FedEx spoke frankly. The global slowdown in trade, increased costs for the Ground unit, and high costs associated with TNT Express integration all played a part. Tough news for a company trading well below the $240 to $260 range it had enjoyed for much of 2018.
A goal of mine is to be in position to take advantage of opportunities presented by the market. I try to stay alert to big dips and have cash in the account ready to deploy when the moment is prime. I hope I have learned my lesson to avoid jumping on speculative companies with poor or limited track records. It is not always easy to wait around for the established players to dip. Especially in this bull market of overvalued companies. I lose patience and want to put unused funds to work immediately instead of holding a little in reserve.
Entering the Trade
I keyed in on FDX’s share price plummeting from highs around $168 on December 16th to down around $146 on the 18th. Over the next two days, I monitored the ticker to see if the share price would find a support level. By the 19th, I felt it had leveled off, so I bought four shares at $146.50. Not big-time by any means, but the beauty of being a rookie investor with a tiny bankroll is that even a profit of two to three dollars is exciting and meaningful for my account. Naturally the same is true for losses.
At this point, I do not have the experience or proven track record to even consider throwing large chunks of money into a swing trade. The goal is learning and proving out a strategy before taking out a second mortgage. Also, I’m not taking out a second mortgage.
Trading Off Earnings Volatility
One strategy for swing trading is to pounce when a company’s share price dips after a disappointing earnings report. Healthy, established companies may experience a significant dip in share price when earnings are not as glorious as the market wants them to be. The beauty is that the share price of these companies often starts on a recovery trajectory a few trading days later.
Sure enough, FDX started a grind back to the north and quickly settled above $150. I set and hit a stop loss of $151.50 for two shares on December 30th for a profit of $10.00. My stop loss was a bit too tight and didn’t give the price room to stretch. Rookie mistake. I hung a much looser stop loss on my last two shares. The price rose steadily for three weeks. I set progressively higher stop losses as the price rose. On January 21st, I hit my stop loss and the final two shares sold at $158.40.
I ventured $586.00 on the swing play and came away with a profit of $33.80. My funds stayed tied up for thirty-three days and brought back a return of 5.77%. Nobody is rushing to a Porsche dealership on that return, and that is not the point. I made a meaningful increase to my trading fund, and if the deal had gone south, I’d be left holding four shares of a well established, dividend paying global company. My swing trade would shift to a position trade or a long term investment.
Swing Trading for Profit – Lessons Learned
This is the kind of opportunity I have missed in the past and will certainly miss in the future. I can’t and shouldn’t be diving after all these opportunities. I do want to be ready for some of them. A 5.77% gain and $33.80 of captured profit is not changing anyone’s life. However, a trader that can scale that strategy and execute it successfully on a consistent basis, will have a reliable tool to generate profit. If you scale it up to where traders are buying 100 shares, they are coming away with a profit of $845. Even when following my clumsy handling of this FDX example
On the flip side, you must be careful buying into a company that has had a significant dip. That risk is reduced if the company has a strong track record of growth and a reliable dividend. You may end up sitting with those shares tied up for a long period of time. Be sure it is a company you would be happy to own and invest in for the long run. Risk can also be addressed by setting a close stop loss just in case the share price starts to really break towards new lows.
Thank you for taking the time to read along as I document my slow, but hopefully steady, learning process. You can catch up on all my recent investment activities in my Dividend Builder – January 2020 update.