Maximizing Profits on Swing Trades

Maximizing Profits on Swing Trades

For traders to increase their profitability, they must learn how to maximize the profits on their trades—not through greed or fear, but through technique.

Sell the Opening Gap

A gap up at the end of a swing is a warning. It is usually a last blast of buying just before a pullback begins. Once price turns down after a several day ad­vance, there are no more buyers willing to pay the higher prices. Suddenly sellers have to turn their sites downward io find buyers at lower prices. The stock begins to collapse on the intraday time-frame. This is an unfortunate scenario for inexperienced traders who bought at the swing high. They find themselves immediately in a losing trade that continues to decline. The higher the volatility of the stock, the more, and the faster, the pain will set in. They may end up exiting during the decline, often just before price turns back up.

Skilled swing traders know that the gap is a bonus at the end of a price move. It can be looked at as a stern warning to take profits before a pullback begins.

A high percentage of gaps that occur at the market open are filled within the same trading day. This is true of gaps up or down. Often a trader can lock in additional profits by immediately exiting an opening gap that forms at the end of a price advance or decline. In some cases, the additional profits can be sub­stantial, for example, on a Dark Cloud Cover formation.

If the stock is trading actively in pre-market and the spread is narrow enough, which is likely if price is set to gap at the open, the stock can be exited before the open. A limit order can be used to exit a trade in pre-market. Market orders are held until the open—they will not be executed in pre-market or after-hours trading.

If waiting until the open to exit, traders can begin monitoring the price action on a low intraday time-frame, such as a 5-minute chart. If price holds up in the first few minutes, it may run in the opening direction for a short time after the open. There is a good chance price will still reverse by approximately 30 minutes into the trading day. The first few minutes after the open, and again near 10:00 a.m. Eastern Time, are strong reversal times.

Some traders like a “stop and reverse” strategy. They may exit the long position and go short, or vice versa on a gap down. They may sell short on the high likelihood of the gap filling. Traders should be cautious shorting against a strong uptrend. The pullback may be short-lived if the stock is in favor with traders or belongs to a strong sector. The stop and reverse method may be more profitable if the swing up was quite significant, or if the swing up encountered resistance.