Reader Alex asked:
My name is Alex and I’ve been swing trading for two years. I’ve been reading SMB’s blog for a while, and really enjoy the posts on trader development. I have recently journaled a question that emerged during two of my recent short trades. I believe that this question relates to intraday trading as well. Depending on conditions and the setup I’m trading, I like to take profits on 1/2 of my position when my first profit target is hit, move my initial stop loss to break-even, and hold the remaining 1/2 for a second profit target. The issue I ran into with two of my recent swing trades was that my break-even price (entry price) was not in a “technically correct” area (i.e., not above a recent resistance/value area; it was actually just inside of it). In these situations, should a stop loss be moved to my entry price (although a higher probability exists that it will be breached if that resistance level is tested) or should I risk taking a loss and move my stop above the resistance area? Any thoughts would be much appreciated.
Bella Responds:
Alex, great job of recognizing a potential flaw with your exit. Awesome job of developing a system to trade your setups. I love this idea of moving your exit prices to above the resistance level on shorts. This makes more sense. Why cover if the stock is still below resistance? Also, would it be best for you to add more if/then statements to your exit? Some examples: a) Cover if the stock breaks its intraday downtrend. b) Cover if the corresponding futures spike. c) Cover if the clear seller causing the stock to trade in a downtrend disappears. d) Cover if the stock is just not as weak as you expected. The more if/then statements and conditions you develop for your intraday trades the more consistent your results. While you obviously don’t want to miss the big move, keep in mind that trading is generally more complicated then I am short and if it works great and if it doesn’t I lose. Intraday swing traders must learn to trade the subsets of their set ups—and that means being more nuanced with your exits.
You’re on a terrific path. Very well done working on improving your results. This is the most important aspect of your trading, including your results. Thank you for your terrific question and contribution to our community.
3 Comments on “Traders Ask: What is the Proper Exit on a Swing Trade?”
Alex,
A couple thoughts. In my swing trading, I do something very similar re covering part of my trade once the market has moved 1X my initial risk and moving the stop on the rest to more or less breakeven. This works because my initial risk point was at a level that “makes sense” for the normal swings of the market I am trading, so it also makes sense on the profit taking side. It is only a guideline, and I will adjust it slightly if the technicals dictate. For instance, it is just stupid to try to take profits on a short just beyond support — much better to take profits a little in front or significantly beyond. It follows, then, that if my entry was just below a support level my stop should probably remain above that support level as the market does not know where I got in, right?
I will usually continue to piece out of my trade at other whole number multiples of my initial risk, but am also willing to put some risk back on at more favorable levels. I also think it is absolutely critical to remember what timeframe got you into the trade, and to use signals from that timeframe to manage the trade. If I get into a trade because of a long-term consolidation pattern, I consider it a mistake to make exit decisions based on intraday action. Conversely, if I get in a daytrade I cannot use higher timeframe technicals to justify taking more risk on the trade once I’m in it. Remember why you are in the trade. Remember who brought you to the dance!
Insightful question. Remember, when swing trading we’re not right that often. (At least I’m not.) So, when we are right, our goal is to press our winners correctly, without exception, every time. Placing stops too close is one of the silliest swing trading mistakes possible, in my opinion.
Alex,
A couple thoughts. In my swing trading, I do something very similar re covering part of my trade once the market has moved 1X my initial risk and moving the stop on the rest to more or less breakeven. This works because my initial risk point was at a level that “makes sense” for the normal swings of the market I am trading, so it also makes sense on the profit taking side. It is only a guideline, and I will adjust it slightly if the technicals dictate. For instance, it is just stupid to try to take profits on a short just beyond support — much better to take profits a little in front or significantly beyond. It follows, then, that if my entry was just below a support level my stop should probably remain above that support level as the market does not know where I got in, right?
I will usually continue to piece out of my trade at other whole number multiples of my initial risk, but am also willing to put some risk back on at more favorable levels. I also think it is absolutely critical to remember what timeframe got you into the trade, and to use signals from that timeframe to manage the trade. If I get into a trade because of a long-term consolidation pattern, I consider it a mistake to make exit decisions based on intraday action. Conversely, if I get in a daytrade I cannot use higher timeframe technicals to justify taking more risk on the trade once I’m in it. Remember why you are in the trade. Remember who brought you to the dance!
Insightful question. Remember, when swing trading we’re not right that often. (At least I’m not.) So, when we are right, our goal is to press our winners correctly, without exception, every time. Placing stops too close is one of the silliest swing trading mistakes possible, in my opinion.
Alex,
A couple thoughts. In my swing trading, I do something very similar re covering part of my trade once the market has moved 1X my initial risk and moving the stop on the rest to more or less breakeven. This works because my initial risk point was at a level that “makes sense” for the normal swings of the market I am trading, so it also makes sense on the profit taking side. It is only a guideline, and I will adjust it slightly if the technicals dictate. For instance, it is just stupid to try to take profits on a short just beyond support — much better to take profits a little in front or significantly beyond. It follows, then, that if my entry was just below a support level my stop should probably remain above that support level as the market does not know where I got in, right?
I will usually continue to piece out of my trade at other whole number multiples of my initial risk, but am also willing to put some risk back on at more favorable levels. I also think it is absolutely critical to remember what timeframe got you into the trade, and to use signals from that timeframe to manage the trade. If I get into a trade because of a long-term consolidation pattern, I consider it a mistake to make exit decisions based on intraday action. Conversely, if I get in a daytrade I cannot use higher timeframe technicals to justify taking more risk on the trade once I’m in it. Remember why you are in the trade. Remember who brought you to the dance!
Insightful question. Remember, when swing trading we’re not right that often. (At least I’m not.) So, when we are right, our goal is to press our winners correctly, without exception, every time. Placing stops too close is one of the silliest swing trading mistakes possible, in my opinion.