A stock market correction is not the time for bravery in your swing trading strategy. You can pop your head up when the coast seems clear, but you must be ready to duck and cover at the first sign of trouble. GoDaddy (GDDY) stock was a recent casualty of current market pressure.

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Use Test Buys In A Stock Market Correction

It’s tempting to try and time the exact bottom of a stock market correction, but it’s difficult in practice. Here’s a swing trading strategy to use: Keep your portfolio exposure limited with some test buys at the first signs of a market bounce. Then, find potential swing trades that are exhibiting proper behavior. Look for signs of a reversal or breakout, relative strength, and volume confirmation. If you also see other members of the industry group showing these same signs, that’s even better.

The more stocks you find, the more conviction the market rally is for real. Fewer stocks should increase your suspicion that the stock market correction may not be over. In either case, it’s not the time to get your portfolio back to fully invested. With this swing trading strategy, don’t plunge. Dip.

A normal position size, or smaller given the market volatility, leaves a portfolio’s exposure low. If the stock market correction continues, keep your loss small on the stock and you’ll outperform the market with the reduced exposure. If the market rally works, you’ve got an early start in building your portfolio back up. You may underperform at first, but will quickly catch up if the market strength continues.

Applying Swing Trading Strategy With GoDaddy Stock

When the market showed a bounce on March 29, GoDaddy stock joined IBD’s SwingTrader(1). The stock declined with the market in mid-March but with a shallower descent. That’s a strong sign of relative strength. It bounced near its 50-day moving average, then jumped 4% on the day of its entry. Its volume at the time already was tracking higher than any day during its pullback (1). The computer software enterprise group ranked No. 2 out of the 197 IBD Industry Groups. Group mates Paycom (PAYC) and ServiceNow (NOW) demonstrated that GoDaddy wasn’t alone in its power.

However, although it looked good, one day of strength does not end a stock market correction. The next day started well but when the market turned south GoDaddy fell with it. The bearish reversal was an early indicator that the stock and market may need more time. It exited SwingTrader before it took out the stop loss at the entry day low. Rather than a 2.8% loss, we only got nicked 1.3%. GoDaddy was the only active trade at the time. It was our test buy. As a single position, that would translate to a couple tenths of a percent effect on your portfolio. It started showing another sign of a reversal a couple of days later (3). But the stock market correction continues.

The best swing trading strategy for handling a stock market correction is to avoid it. If you are going to make an attempt, cutting the loss quickly makes sure you live to fight another day.

More details on Past Trades are accessible to subscribers and trialists to SwingTrader. Free trials are available.

(For additional swing trade and market commentary, you can follow me on Twitter at @IBD_JNielsen)

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Don’t Let Stock Losses Steal Your Sunshine

Swing Trading Strategies And Lessons

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