This week, one of our recent trade ideas, on BT, came within a whisker of our profit limit. As nice as that was for clients, what was even better were the three valuable lessons on offer about profiting from short-term moves within longer-term trends, and continually reviewing all open trades.

Lesson #1 – Long-term trends, Short-term trades

Our 3 May Short Sell BT trade idea was aimed at helping clients profit from the likelihood of the telecom giant’s shares taking another leg lower. Already in an obvious 2yr falling channel, the shares had tired and rolled over after a 16% rally from late March. A host of bearish signals were flashing on the price chart and technical indicators. It looked like a case of Groundhog Day for BT and the shares ripe for being sold short to profit from a potential 15% fall from 237p down to 200p.

The shares subsequently collapsed 7% on 10 May after full year results disappointed, investors unimpressed by full year guidance (a topic I wrote about last week). The plunge saw many jump ship to protect from further losses. But it also attracted those looking to trade negative momentum, eyeing up potential for another 10% drop from 220p to levels last seen in Summer 2012.

This only added to the downward pressure, taking the shares and our trade even more quickly towards our target, falling for another four days on the trot to lose (gain in our case) another 9% in value.

Lesson #2 – Don’t look a gift horse in the mouth

Shares falling even faster than expected is never a bad thing when you’re trading them short. However it also meant they attracted the attention of bargain hunters hoping to profit from any subsequent share price bounce. As the declines slowed up, and the shares found some support around 202p, the chance of a bounce began to increase. This would not only erode our handsome profits but also reduce the chance of the shares falling all the way to our target.

And here-in lies the lesson. It wasn’t worth being stubborn about the shares falling the extra 2p. Not when they had already fallen 95% of the way towards our target, and the trade was up nearly 15%. The reward vs. risk multiple on the trade was a healthy 2.8x at the outset. With just 2p/0.8% to go, the additional reward was far from worth the now much higher risk. Unhealthy even.

One should really allow the winning trades to run and cut the losers early. However, the chart showed a tendency for the shares to bounce strongly following a strong sell-off. With 6yr support potentially lurking 197-200p, the risk of a bargain hunting rebound was high. So too thus was the urgency to crystallise handsome profits and deploy them elsewhere, on trades offering much better risk reward and decidedly more upside.

Lesson #3 – Take another look

You may say Lesson #1 doesn’t apply to you because you don’t like Short Selling. Fair enough. But Lesson #2 applies to all trading situations, Long or Short. And if don’t trade short then Lesson #1 will apply to you, in reverse. Because, after falling so far so fast, and sitting so close to round number 200p and 6yr support at 197p the shares may be preparing for a rebound. Another rally from the channel floor to the channel ceiling would offer a similar 15% profit, representing yet another short-term trade within that same long-term trend.

Groundhog Day is synonymous with boring, repetitive and predictable. But what could be better when trading shares, than a candidate like BT which has a tendency to do the same thing over and over, giving you multiple opportunities to profit?

Accendo Markets publishes well-structured trades ideas, supported by strong technical analysis and common sense reasoning every day. To make sure you know when we believe a UK Index blue-chip like BT is primed for a rebound, get access to our award-winning research. Let us do the work and you can take the credit.

Mike van Dulken, Head of Research, 18 May