There are times when your swing trades get off to a bad start. Perhaps fundamental conditions changed the moment you entered the trade. Perhaps your assessment and directional bias were just plain wrong. Perhaps, the market dynamics just wasnt there at the start.
Whatever may be the case, this is a situation in which you dont want to exit the trade because it still looks like it might go your way, but as things are currently going, theres no indication that its working out for you either. In short, you dont want to commit either way, to stay in or get out.
Is there a way to minimize what might end up a losing trade? Is there a way to protect what might become a winning trade? Might there be a means to meet the situation halfway?
Closing a portion of your position early and trailing your stop
Assuming you have a profit target, closing out half of your position at the halfway target point might be one solution. Raising your stop to minimize your losses or to a breakeven point (if your position exceeds the halfway target) might be another.
Let’s take a look at a couple of hypothetical trades attempting to go long on the SPY:
Let’s assume that you are looking to get into a long position as the S&P enters correction territory. From October 11 to 17, swing low and swing high points have been established giving us a potential target should the SPY continue to correct further (if it didn’t, as in, if it continued its upward movements, then let’s assume that you’d wait for a retracement to get into a position).
The SPY violates the previous swing low and you notice a divergence in the direction between the two consecutive swing lows and the RSI at (1). Because of this divergence, you decide to go long upon violation of a local swing low point which turns out to be (2).
Your long entry gets triggered (see orange arrow) at the price of 270.30.
Now let’s suppose you’re concerned that SPY will fail to breakout from your upward target of 281.15 which is the previous swing high. You’re worried that the SPY might continue its corrective trajectory downward. You don’t want to close out your trade but at the same time, you don’t want to miss out on a potential profit.
Heres what you decided to do: you measured the halfway point between your entry and your target (3) at the price of 275.72. Fortunately, SPY hits this halfway point and you close out half of your entire position. Next, you decide to move your stop loss. If you moved it to breakeven, you would have been stopped out. If you trailed the lows of each consecutive bar, then you might have hit your target at (4).
SPY fails to break above (4) and resumes its decline. At this point you are probably asking yourself, is the SPY transitioning from a trend into a trading range?. Quite possible, as the ETF establishes another swing low above support, failing to take down the previous swing low. You see another trade opportunity to do a quick swing trade at (5). Your long entry gets triggered (orange arrow).
Using the same methodology, you estimate a halfway target at 274.15 as illustrated at (6), with your main target at (4). Your halfway target gets hit (taking half of your position off) though SPY fails to reach your main target at (4). If you were trailing your stop, you might have been taken out at 277.50 on December 4, after which, SPY breaks below this range and establishes a strong downtrend.
Takeaway: when you are uncertain about a particular trade (as in, a subjective 50/50 estimate whether a trade will end in a profit or a loss), you don’t have to remain passive or close out your trade entirely. In scenarios where you have room to make adjustments, managing your trade by taking partial closes and trailing your stops can sometimes turn a potentially losing position into a potentially winning scenario.
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