How To Trail Stops On Winning Swing Trades For Maximum Profit

[morpheustrading 10]

Being a consistently profitable swing trader is a juggling act that requires one to constantly be focused on a variety of key elements of success: picking the right stocks, managing risk, determining when to sell, and even mastering the psychology of trading.

 

In this educational trading strategy article, we will dive into the topic of knowing how and when to sell winning ETF and stock swing trades for maximum profit, using the example of an actual swing trade we are currently positioned in. As for when to sell losing trades, there’s frankly not much to say other than always have a predetermined stop before entering every trade and simply honor it.

 

Since April 12, the model trading portfolio of our swing trading newsletter (The Wagner Daily) has been long Market Vectors Semiconductor ETF ($SMH). We initially alerted traders of the technical reasons we were bullish on the semiconductor sector (and $SMH) in this March 28 post on our trading blog. Since then, we have also reminded regular readers of our trading blog several more times about the increasing relative strength in semis.

 

In the “open positions” section of today’s (May 13) Wagner Daily, subscribing members will notice we have trailed our $SMH protective stop higher for the fourth consecutive day. Because the ETF is already nearing our original target area of $40, while remaining on a very steep angled climb, we have been continually squeezing the stop tighter in order to protect gains, while still allowing for maximum profit.

 

On the daily chart of $SMH below, we have labeled the increasingly higher stop prices we have used in each of the past four sessions:

 

 

As you can see, our stop in each of the past four trading sessions has been raised to just below the low of the prior day’s session. Whenever an ETF or stock is nearing your target area and you wish to maximize profits while still protecting gains, setting a stop just below the previous day’s low (allowing for a tiny bit of “wiggle room”) is a great strategy. This is because basic technical analysis states the prior day’s lows and highs act as very near-term support and resistance (respectively).

 

By using this method for trailing stops, you will be out of a winning position before the start of a significant pullback, while still allowing the gains to build as long as buying momentum remains. This system also provides an objective way for knowing when to close a winning swing trade, rather than guessing and potentially leaving significant profits on the table.

 

Of course, there are many different ways to manage exits on winning momentum trades, and some of those methods are equally as effective as what is explained above. The reality is that any trading system can be a great one if the trader proves to be profitable with it over the long-term (even if the system involves trading by the cycles of the moon).

 

As such, we would never imply that our system is absolutely the best way to manage stops on winning swing trades. But what we truly love about our exit strategy is its utter simplicity; simple trading strategies are the easiest to follow and thereby profit from. Why complicate a technique that has already been proven to work so well?

[markloran 10]

Thanks for providing information.

[morpheustrading 10]

Thanks for providing information.

 

My pleasure. Glad you enjoyed the article.

[sidra 10]

Great effort indeed ! You can add more information in this and it will be more attractive that way. I have been in touch with many forums since i have set my mind to be a Trader. well there is surely a database that can help you a lot in staying in touch with the world globally, and it is Quandl - Find, Use and Share Numerical Data

The best thing is, it gives easy download in quick time.

Happy trading

[TimRacette 11]

Thanks for the article. I like to leave my stop loose at first and as the trade starts to go parabolic tighten it more aggressively. For a long I start with a stop under the swing low, then when we move to new highs, pull back and make new highs again I will put it under the next swing low, then if we make new highs again I trail the prior days low. Vice versa for shorts.

[sergso 10]

What about cases that the method does not work meaning that the pullback does not happen but the stop is taken out and the market reverses to make new highs?

[Crude8 10]

Simple Parabolic SAR will do the trick of trailing a winning swing trade

[steve46 12]

What about cases that the method does not work meaning that the pullback does not happen but the stop is taken out and the market reverses to make new highs?

 

Chuck LeBeau's "chandelier" stop is by far the best I have ever seen.....(apologies to the original poster).....google it and use it.....and for those who really want to do this right....there are other ways to make trade management decisions....the best professional system I ever saw was based on the work of Ken Shaleen....using open interest and volume to determine directional bias...

 

For the handful of folk really interested in moving forward, these are the resources I would start with...instead of the amateur hour crap that gets posted here...

[SIUYA 11]

What about cases that the method does not work meaning that the pullback does not happen but the stop is taken out and the market reverses to make new highs?

 

you always need a way to re-enter. Some of the best traders i know go at the same idea a number of times- cut, cut, cut, cut - win.

Maybe not so applicable to day trading - system specific.

[BlueHorseshoe 10]

Chuck LeBeau's "chandelier" stop is by far the best I have ever seen.....

 

I tested the crap out of this several years ago. Meh. It was okay. These so called "volatility" stops are all much of a much-ness really - standard deviation, average true range, it's all just throwing in a load more stuff to worry about . . .

 

In directional trading, any kind of hard stop introduces a non-linearity to the strategy.

 

Why not look at using options, hedged pairs for market-neutrality, intelligent position sizing, zero leverage to cope with the tail risk . . . Think outside the entry/exit/stop/target retail box?

 

Kind regards,

 

BlueHorseshoe

[steve46 12]

I tested the crap out of this several years ago. Meh. It was okay. These so called "volatility" stops are all much of a much-ness really - standard deviation, average true range, it's all just throwing in a load more stuff to worry about . . .

 

In directional trading, any kind of hard stop introduces a non-linearity to the strategy.

 

Why not look at using options, hedged pairs for market-neutrality, intelligent position sizing, zero leverage to cope with the tail risk . . . Think outside the entry/exit/stop/target retail box?

 

Kind regards,

 

BlueHorseshoe

 

As has been pointed out by others before me, your claim to have tested (anything really) means nothing....my comment stands and any reasonably intelligent person will do their own testing in order to obtain current data and make an informed decision.

 

Ken Shaleen's work also stands on its own....to each his/her own....I use it to my benefit...and I notice many others whom I respect do the same....as with all things DO YOUR OWN TESTING...

[SIUYA 11]

I tested the crap out of this several years ago. Meh. It was okay. These so called "volatility" stops are all much of a much-ness really - standard deviation, average true range, it's all just throwing in a load more stuff to worry about . . .

 

In directional trading, any kind of hard stop introduces a non-linearity to the strategy.

 

Why not look at using options, hedged pairs for market-neutrality, intelligent position sizing, zero leverage to cope with the tail risk . . . Think outside the entry/exit/stop/target retail box?

 

Kind regards,

 

BlueHorseshoe

 

Blue - while it is just throwing more stuff at it - at least it gets people thinking more about volatility based stops IMHO.....you correctly touch on this regards position sizing etc--- problem again is that often most folks dont have large enough accounts to worry about this.

...and it does depend on the system (thanks Zdo)

 

Problem with the use of options is in the testing....

 

Personally - trailing hard stops is fine no matter what you use - so long as you have a good method for re-entry because its exactly the problem Sergso mentioned. I also wonder if trying to go both long and short introduced far more problems in such a test/system.

 

A lot of this boils down the differences between systematized (backtesting possible) trading and discretionary trading (only forward testing really possible - then open to scrutiny)

[morpheustrading 10]

Hey Tim,

 

This sounds like a very solid strategy and is similar to what I do, depending on market conditions. I trail tighter than that in shaky markets.

 

Thanks for sharing your strategy.

 

Deron

 

Thanks for the article. I like to leave my stop loose at first and as the trade starts to go parabolic tighten it more aggressively. For a long I start with a stop under the swing low, then when we move to new highs, pull back and make new highs again I will put it under the next swing low, then if we make new highs again I trail the prior days low. Vice versa for shorts.

[morpheustrading 10]

This will obviously happen sometimes, and it doesn't bother me at all.

 

First of all, my goal is never to buy at the absolute bottom and sell at the absolute top. Rather, I focus on taking the "meat out of the middle" of the move.

 

Second, I am never afraid to re-enter a trade if it turns out I exited prematurely. In this case, I simply wait for the first short-term pullback to support.

 

What about cases that the method does not work meaning that the pullback does not happen but the stop is taken out and the market reverses to make new highs?

[morpheustrading 10]

Hey Steve,

 

Not familiar with either of these systems, but will definitely check it out. Thanks for sharing.

 

Deron

 

Chuck LeBeau's "chandelier" stop is by far the best I have ever seen.....(apologies to the original poster).....google it and use it.....and for those who really want to do this right....there are other ways to make trade management decisions....the best professional system I ever saw was based on the work of Ken Shaleen....using open interest and volume to determine directional bias...

 

For the handful of folk really interested in moving forward, these are the resources I would start with...instead of the amateur hour crap that gets posted here...