Swing Trading Exit Strategy

Learn how to take profits and control your losses! Your exit strategy consists of two parts: Where will you get out of the trade if the stock does not go in your favor? Where will you take profits if the stock does go in your favor?
These are the two questions that make up your exit strategy. You have to be able to answer these questions before you can place the trade!

Your Stop Loss Order

A physical stop loss is an order to sell (or buy if you are short) that you place with your broker. A mental stop is YOU clicking the sell (buy) button to get out of the trade. From a technical perspective, it does not matter which type you use.
Before you get into a trade you will have a plan that will determine when to get out of the trade if it does not go in your favor. You are a disciplined trader that always follows your plan (right?). Whether you use a mental stop or a physical stop, you will always want to exit the trade when you predetermined plan tells you to.
Note: See this page for why you may not want to use an actual order placed with your broker.
Where is your stop going to be? First of all you need a stop that makes sense and you need it to be out of the "noise" of the current activity in the stock.
Look at the average range of the stock over the past 10 days. If the average range of the stock is, say, $1.10, then your stop needs to be at least that far away from your entry price. It doesn't make any sense to have your stop .25 cents away from your entry price when the range is $1.10. You will surely get stopped out prematurely!
For long positions, your stop should go under a support area and a swing point low. Like this:
You can see in the chart above, that the stock comes down into the TAZ and then reverses with the low at a previous resistance area. We know that resistance can become support so it makes sense to put our stop under the swing point low (circled).

Time Stop

When you buy or short a stock, you are expecting the stock to go in your favor within a few days. What happens if it doesn't? Do you continue to wait for it to move in your desired direction? No. You will want to sell (or cover) your shares and move on to something else.
You don't want to tie up your trading capital on a stock that is just trading sideways. Treat a stock like an employee. If it doesn't do what you want it to do - fire it!
Ok, that takes care of the first part of our exit strategy, now lets look at second part: taking profits!

Taking Profits

Use trailing stops! This is an easy and unemotional way of exiting a trade. If this trade is going to be a typical swing trade with a holding time of 2-5 days, then you can trail your stops 10 or 15 cents under the previous days low or the current days low - whichever is lower.
Here is an example:
There is a day by day example of a trailing stop loss order on this page.
If this is a first pullback scenario, then you may want to hold this for a longer time frame. Having some big winners every now and then will fatten up your trading account! In this case you can trail your stops under the swing lows (or highs for shorts) until stopped out. Like this:
In either case, you should always determine where your stop is going to be and how you are going to take profits before you get into the trade. Have a solid plan in place (write it down). This will take all of the emotion out of the trade. Then you can relax and trade the "map" that you have created. This will make your exit strategy easy to follow and it will put you on the path to success.