How to Swing Trade Summary (C13): Entry and Exit

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You’ve scanned the markets and found a promising looking trade.

You then determined your entry, stop-loss and profit-limit, and used these figures to calculate your risk-reward ratio, which is equal to or greater than 1:2.

Now comes the time to actually place the trade.

When you calculate your risk-reward ratio, you are working off an assumed entry price.

But there is no guarantee you will actually be able to buy at that price. Especially if you have done your calculations while the market has been closed.

Your trading plan must include the most extreme price you are willing to pay in order to keep your risk-reward ratio equal to or above 1:2. Knowing this beforehand will prevent you from chasing a price too high.

When entering a trade, you can place either a limit or a market order. You may have other options also depending on your broker, but these are the two fundamental ones.

A limit order means you enter a bid at a price lower (for a long trade) than the current price. If the price drops to that level, it will automatically be bought. You may get a lower price for the stock, but also, the order may never get filled if the price doesn’t drop to your limit.

A market order is when you buy the asset at the current trading price.

As a general rule, if the market place is open and the price of the asset falls within your risk-reward ratio, then it is best to buy it straight away.

Of course, different circumstances call for different strategies.

When you enter a trade, you should always set a stop-loss.

If the trade doesn’t go your way, then you will be stopped out and your exit is automatic.

If the trade does go your way, then the goal is to exit with a profit.

Even when a trade is going your way, you haven’t made a profit until you actually exit the trade!

There are a few options here.

The first option is to set a profit-limit. Once that price is reached, your assets will automatically be sold.

Another option is to ‘scale out’.

Scaling out is when you take partial profits and then let the remainder of the position ride. This allows you to secure some profit while still keeping a position if the trend is continuing in your favor.

You can set an alert so you will be notified when your target-profit is reached.

When scaling out, move your stop-price up so if the price turns against you, you won't be giving up all the gains.

When trading based on support and resistance levels, liquidate half your position at your profit-limit and move your stop-limit up to protect the remainder from dropping below a 1:2 risk-reward ratio.

On hot sector mania or breakout plays, scale out slower.

Many brokerages offer a trailing stop.

In a long position, a trailing stop will automatically move your stop-loss up as the stock price climbs, but will not move down if it falls. How much it is moved up is predetermined by you.

For example, if you buy a stock at $50 and set a trailing stop of $5, the stop will remain $5 below the highest price reached; if the stock rises to $60, the stop adjusts to $55, but if it drops to $55, your shares will be sold.

When setting a trailing stop, you need to consider normal price fluctuations so you don’t get stopped-out too early.

Use the ATR (Average True Range) to help you decide. Multiply the ATR by 1.5.

For example, if the ATR of a stock is $2, multiplying it by 1.5 gives you $3. Set your trailing stop at $3.

Read the next chapter here.

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