How do you exit your trades as a swing trader?
Recall, swing trading is all about capturing one swing in the markets. And logically, when you exit your trades, you want to exit your trades before opposing pressure comes in.
As a swing trader, you're not trying to ride trends in the markets and endure the retracements that come along the way. As a swing trader, you’re just interested in capturing that one move in the market.
So you’ll want to exit your trade before the opposing pressure steps in.
Here’s a simple example:
If you buy the lows of support, where do you want to sell? Where will opposing pressure come in?
If you look at this right, clearly the opposing pressure will likely come in at resistance, where people are looking to sell at resistance and take profits at that level.
This is where opposing pressure will step in.
Alternatively, if we talk about a weak trend, we have a deep pullback comes in and makes another deep pullback, you buy near the lows of this pullback.
Where do you want to sell? Where will opposing pressure come in? Likely they would come in near these highs over here:
You want to be selling just before the highs, at this swing high over here. This is what I mean by identifying levels where opposing pressure will come in.
This is important, so let me walk you through a few simple exercises to train your eyes to this.
This is EUR/AUD on the daily timeframe:
Let’s imagine that you are short, you just sold off at these lows.
Where is a logical place to take profits? Where on the chart would opposing pressure tend to come in?
This is a level you want to be paying attention to possibly take profits.
You will notice that the market has respected that level several times. You can see that the 1.60 area is a significant level.
If you are short in the market, this is an area you are to exit the market and take your profit, by just capturing one swing in the market.
You are not trying to ride the entire move down.
This is how you exit your trade-in swing trading. In essence, you are just asking yourself, where would opposing pressure come in?
You want to exit your trade right before opposing pressure comes in.
How to set profit targets
One thing to share with you is that you don't want to get greedy in setting profit targets.
In setting profit targets. I know what some traders will do is they will set their targets at the absolute lows over here trying to squeeze the market out of every pip.
That's not a good idea. Why is that?
Remember, you're dealing with areas on your chart. The market may not get to this low and reverse, it may just come to this area and then reverse it.
If you have your target right at these greedy levels, you will not exit with a winner, but as a loser, as the market will reverse and hit your stop loss.
Don't be greedy with your targets or give the market some buffer to take you out of the trade. Don’t aim for the absolute highs or lows.
Best time to enter a trade
When is the best time to enter a trade?
Let’s have a look.
The market is in a weak trend. Let’s say you are looking to short this market in a downtrend and capture just one swing.
Your entry point, let’s say you use the market order. And where do you set your stop-loss?
Would you want to set your stop loss at these highs of resistance?
No, because you know that this is an area of resistance.
Also, if you pull out your 200MA, you would see that the market is finding resistance at 200 periods moving average.
This is an area of resistance and it doesn't make sense to be setting your stop loss at this area of resistance.
Because the market would come up higher, hit your stop loss at resistance and the collapse lower.
To set a proper stop loss, you want to set it at a level where if the price rejects it, you will invalidate your trading setup.
One technique I can share with you is to use the ATR indicator and just add on 1 ATR towards the highs of resistance.
I usually use 20-period ATR and I go with SMA.
What you want to do is find out what's the current ATR value. The current ATR values about 40 pips right now.
What you would do is to add 40 pips to the highest resistance. And set your stop loss at that price level.
Next, where do you want to exit your trade?
As you know, swing trading you want to exit your trade before the opposing pressure comes in. So you’ll shift your target to somewhere here:
IF you look at this potential trading setup, you're in essence risking $1 to make $0.34.
How do I know that?
The red area is your risk and the green area is your potential reward.
If you look at this tool, it tells you the risk-reward ratio is 0.34. This is not a trade I want to be taking, I don't want to be risking $1 to make potential $0.34 on the trade.
What should we do?
This is where patience is important. You want to let the market come to you. Let's say instead of chasing the markets lower, we trade it from a favourable trade location.
We will be camping and waiting in this area of resistance. By being patient, we have dramatically turned the table.
Now we have a potential risk to reward of 2.22. This means that you risking $1 to potentially make $2.22. See the difference?
By trading from an area of value, you’re putting yourself in a more favourable risk to reward trade. This is powerful stuff. It doesn't matter whether you're a swing trader or a day trader.
This concept can be applied at the same rate, basically measuring your potential risk on the trade to your potential reward.
And the best time to be timing your entries is when you are near the area of value because that's where your stops can go beyond that area slightly.
This is powerful stuff, don't neglect this.