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Swing Trading Exit Strategy

How To Take Profits And Control Your Losses

Your exit strategy consists of two parts: Where will you get out of the trade if the stock does not go in your favor? Where will you take profits if the stock does go in your favor? These are the two questions that make up your exit strategy. You have to be able to answer these questions before you can place the trade!

Your Stop Loss Order

First, lets put to rest the debate about where or not you should use a physical stop or use a mental stop. A physical stop loss is an order to sell (or buy if you are short) that you place with your broker. A mental stop is YOU clicking the sell (buy) button to get out of the trade. From a technical perspective, it does not matter which type you use.

Before you get into a trade you will have a plan that will determine when to get out of the trade if it does not go in your favor. You are a disciplined trader that always follows your plan (right?). What difference would it make whether or not you have an actual order placed with your broker or if you are going to pull the trigger yourself? There is no difference. In either case, you will get out of the stock when your plan (exit strategy) tells you to!

Personally, I always use physical stop loss orders placed with my broker. This is because I do not want to sit at my computer and look at a monitor all day long! I think I would rather go to a funeral than stare at candles forming on a chart! Ok, maybe that’s a slight exaggeration, but you get the point!

Where is your stop going to be? First of all you need a stop that makes sense and you need it to be out of the "noise" of the current activity in the stock.

Look at the average range of the stock over the past 10 days. If the average range of the stock is, say, $1.10, then your stop needs to be at least that far away from your entry price. It doesn’t make any sense to have your stop .25 cents away from your entry price when the range is $1.10. You will surely get stopped out prematurely!

For long positions, your stop should go under a support area and a swing point low. Like this:

chart of the Vix

You can see in the chart above, that the stock comes down into the TAZ and then forms a bullish hammer with the low at a previous resistance area. We know that resistance can become support so it makes sense to put our stop under the low of the hammer.

Ok, that takes care of the first part of our exit strategy, now let’s look at second part – taking profits!

Taking Profits

Use trailing stops! This is an easy and unemotional way of exiting a trade. If this trade is going to be a typical swing trade with a holding time of 2-5 days, then you can trail your stops 10 or 15 cents under the previous days low or the current days low - whichever is lower.

Here is an example:

chart of the Vix

If this is a first pullback scenario, then you may want to hold this for a longer time frame. Having some big winners every now and then will fatten up your trading account! In this case you can trail your stops under the swing lows (or highs for shorts) until stopped out. Like this:

chart of the Vix

In either case, you should always determine where your stop is going to be and how you are going to take profits before you get into the trade. Have a solid plan in place (write it down). This will take all of the emotion out of the trade. Then you can relax and trade the “map” that you have created. This will make your exit strategy easy to follow and it will put you on the path to success.


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