Swing Mapping Part 3: Trade Management Strategies

Welcome to Swing Mapping Part 3, where we delve into three different approaches to trade management using swing mapping methods

Trade management always represents a trade-off between taking profits early and letting winning trades run. There is no perfect solution, but by understanding different approaches, traders can tailor their strategies to their risk tolerance and market conditions.

1. Aggressive Approach: Exit on Failure at Swing High (Low)

The aggressive approach involves exiting a trade when the market fails to hold above a swing high (swing low if short).

Method: Once you’ve entered the trade (long), continue to map the swings highs as defined in Swing Mapping Part 1. Should the market fail to break and hold above the swing high close your trade.

This strategy aims for quick profits without giving back gains, capitalising on short-term market movements. Traders employing this strategy often prioritise locking in profits swiftly, especially in volatile or uncertain market conditions. However, by exiting at the first sign of resistance, traders may miss out on potential larger gains if the market continues to move in their favour.

Positives and Negatives:

1. Positive: Quick profits allow for rapid capitalisation on short-term price movements.
2. Positive: Avoids giving back gains by exiting at the earliest indication of a potential reversal.
3. Negative: Potential for leaving profits on the table if the market continues to trend favourably after the exit signal.

Example: EUR/USD 1hr: Exit on Failure at Swing High

This example on the hourly candle chart illustrates the active approach of taking small profits following failures at a swing high. The first entry takes a retest of support and exits as the market fails to break above prior swing resistance. The second entry then takes a breakout above the swing highs and the aggressive exit approach works well as the market fakes out at swing highs.

(Past performance is not a reliable indicator of future results)

2. Passive Approach: Exit on a Break Below Swing Low

Contrary to its name, the passive approach still requires active monitoring of the market. This strategy involves exiting a trade when the market breaks below a swing low, indicating a potential reversal or loss of momentum.

Method: Once you’ve entered the trade (long), continue to map the swing lows as defined in Swing Mapping Part 1. Should the market break and close below a swing low close your trade.

While this approach provides a more conservative exit compared to the aggressive approach, it may result in giving back some profits gained during the trade. Traders employing this strategy often prioritise running winning trades over taking quick profits – pairing well with trend following entry techniques.

Positives and Negatives:

1. Positive: Gives winning trades more time to run and allows for pullbacks.
2. Positive: Provides a conservative exit strategy, minimising the risk of significant drawdowns.
3. Negative: By definition this strategy will result in giving back profits as the market retraces.

Example: S&P 500 5min: Exit on a Break Below Swing Low

This example is an intra-day trend continuation trade on the S&P 500 5min candle chart. The entry setup was a simple breakout above a cluster of swing highs in-line with the prevailing trend. We can see that whilst we had several stalls at swing highs, taking a more passive approach and using mapped swing lows worked well when managing this trade. The trade was closed when the market broke and closed below a mapped swing low.

(Past performance is not a reliable indicator of future results)

3. Predictive Approach: Place a Limit Order at Key Swing Resistance (Support)

We mentioned in Swing Mapping Part 1 that not all swings are equal. The more bars either side of the swing high or low, the larger the peak or trough in the market – the more significant the turning point. These more significant swings can be used as profit targets.

Method: Prior to entering your trade, identify a key swing on your chart – one that has not been broken for a large number of bars. Place a limit order to take profits at the highest close prior to the key swing.

This strategy allows traders to set a predefined target for profit-taking, reducing the need for continuous monitoring of the market. By setting a fixed order, traders can automate their exit strategy and focus on other aspects of their trading plan.

However, the challenge lies in accurately predicting price targets, as objectives may not always align with market movements. With this in mind, this approach can work in tandem with either the aggressive or passive swing exit methods outlined above.

Positives and Negatives:

1. Positive: Fixed order placement enables traders to "set and forget" their exit strategy, reducing emotional decision-making.
2. Positive: Allows you to define your risk/reward prior to entering a trade.
3. Negative: Objectives may not always align with market movements, leading to missed opportunities or premature exits if the target is not reached.

Example: Tesla Daily: Place a Limit Order at Key Swing Support

Here’s an example of the key swing limit order approach to managing trades. Each entry is a short fakeout entry setup that we discuss in depth in Swing Mapping Part 2. We identify the nearest key swing level that we believe the trade could reach. A limit order is then placed at the lowest close nearest the key swing level.

(Past performance is not a reliable indicator of future results)

Summary

Swing mapping helps you gain a deep understanding of price action and reduces reliance on lagging indicators. It allows you to quickly analyse the strengths of different markets, pinpoint precise entry levels and manage trades in a dynamic way that quickly adapts to changing market conditions.

Now you’ve reached the end of this mini-series on swing mapping, we hope you will feel confident enough to put some of the techniques into practice. Happy swing mapping!