Every trader has a different tolerance for pullbacks against their positions.
Some traders will live through a pullback in price and others will terminate the trade when the first sign of weakness (for a long) or strength (for a short) comes into the market.
Let’s remember a few things about the market before I continue.
- Markets go through periods where we see ranging price action – often called accumulation/distribution although only confirmed in hindsight
- From ranges, we see impulse moves in price where price advances
- Markets pull back (I call these consolidations just like a range) and often we will see a one leg pullback (simple pullback)
- Once markets stretch far away from an average price – the mean – markets will pullback once again and alternate between simple and complex pullbacks
Swing traders, as the name implies, generally shoot for one clean swing in the market. Once price starts to show weakness ( for a long), swing traders will either exit the trade or keep a tight stop.
No, swing trading is not time frame dependent.
I am a swing trader by nature but will also hold a trade through pullbacks depending on the context of the chart. Any price action that I read to be a climax in price, will see me exit the trade.
This brings me to the GBPAUD setup I posted in the free Forex setups for the week of Aug 12.
We were looking for a longer rally to short the currency pair. Using our usual four hour chart for entry gave us a great trade entry – I mention the four hour chart virtually every single week.
We got the rally into the white zone and the short trade occurred. Price dropped to the downside and many traders that took this trade held over the weekend.
We saw a candlestick show up that didn’t give clear indication of which way price may move and for many swing traders, this is a sign of weakening intent to the downside. Placing your stop loss at the high of that candlestick does make sense for a pure swing trader.
The one clean swing of the market would be over if price broke the highs of that candlestick and closed – which it did do. Traders would have booked about 135 pips on that trade.
Risk – Reward
My rule of thumb for trade management is to remove a percentage of the position at 1R – pips in profit that equals the risk on the trade. In this case, I scaled out a portion at 124 pips and moved the stop to break even. I think it is important to pay myself when the idea behind the trade works out.
I submit that if a trade hits 1R, the trade was a success. Since this was a with trend trade, I will keep the other position running knowing that I can’t lose on this trade.
But I also may not make any more.
Scaling out instead of removing the entire position as the one clean swing could result in a less than stellar trade result – although over many trades the equity curve does not disappoint.
It is easy to snatch at profits but if you are seeking higher returns, perhaps finding out a trade management style that respects risk but can allow for greater gains, should be something you do.
Make It A Part Of Your Trading Plan
The fact is that markets will go against you at time and you will see your unrealized profits evaporate. That can be tough!
What is also tough is watching your exited trade turn around and zoom in your former anticipated direction
Having a trade management style that lets you pocket some of the gains but shoot for more if the context is present, is smart trading.
It can’t be an impulse decision. If you were short the chart above and saw the retrace, your trading plan must have rules in place to tell you what to do.
This chart may continue to the upside and nail my break-even price and that is fine.
Because over the course of many year and many trades, I’ve been rewarded by holding on much more than I have by cutting a trade because I was afraid to see the unrealized profits get smaller.
What are you going to do?
This is a really good lesson for me, as I still tend to hang onto trades too long and looking back at past results, I would have realised much more profit if following a similar plan. My particular broker doesn’t allow you to scale out/partial encashment of a running trade, but what I’ll be doing is placing 2 trades for half the risk I would normally and exit one of these at 1:1 RR. Thanks as always.
Hanging on too long is a symptom of not having a clear cut take profit strategy. You must know why and when to exit every trade…either with a win or a loss.
Agreed, agreed! I’ll be putting a lot more effort into defining my exits going forwards.
Hi SD, great article indeed. When you say you scale out, do you close your first entry and open another entry with a smaller position size? Explain to me how does it work?
With me I put trail stop on the trade after having moved to breakeven point earlier.
I scale out a portion of the position size. Example is trading one standard lot of EU, close 30% of the position. Forex is great in this way because you have different lot sizes which makes risk control and profit taking very simple.
great article, thank you. please can you help me with a sample of a trading plan for a price action trader
Here’s a video you can watch to learn how to design your own trading plan: https://www.youtube.com/watch?v=VvQdiTg3SvA