How to Use Trailing Stops on Winning Swing Trades for Maximum Profit

Deron Wagner Founder and Head Portfolio Manager, Morpheus Trading Group

Pro trader Deron Wagner of Morpheus Trading Group, explains how he knows when it's time to sell a winning trade in order to squeeze the maximum amount of profit from it.

Being a consistently profitable swing trader is a juggling act that requires one to be constantly focused on a variety of key elements of success: picking the right stocks, managing risk, determining when to sell, and even mastering the psychology of trading.

In this educational trading strategy article, we will dive into the topic of knowing how and when to sell winning ETF and stock swing trades for maximum profit, using the example of an actual swing trade we are currently positioned in. As for when to sell losing trades, there's frankly not much to say other than always have a pre-determined stop before entering every trade and simply honor it.

Since April 12, the model trading portfolio of our swing trading newsletter, The Wagner Daily, has been long Market Vectors Semiconductor ETF (SMH). We initially alerted traders of the technical reasons we were bullish on the semiconductor sector (and SMH) in a March 28 blog post. Since then, we have also reminded regular readers of our trading blog several more times about the increasing relative strength in semis.

In the “open positions” section of today's Wagner Daily, subscribing members will notice we have trailed our (SMH protective stop higher for the fourth consecutive day. Because the ETF is already nearing our original target area of $40, while remaining on a very steep-angled climb, we have been continually squeezing the stop tighter in order to protect gains, while still allowing for maximum profit.

On the daily chart of (SMH below, we have labeled the increasingly higher stop prices we have used in each of the past four sessions:

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As you can see, our stop in each of the past four trading sessions has been raised to just below the low of the prior day's session. Whenever an ETF or stock is nearing your target area and you wish to maximize profits while still protecting gains, setting a stop just below the previous day's low (allowing for a tiny bit of “wiggle room”) is a great strategy. This is because basic technical analysis states the prior day's lows and highs act as very near-term support and resistance (respectively).

By using this method for trailing stops, you will be out of a winning position before the start of a significant pullback, while still allowing the gains to build as long as buying momentum remains. This system also provides an objective way for knowing when to close a winning swing trade, rather than guessing and potentially leaving significant profits on the table.

Of course, there are many different ways to manage exits on winning momentum trades, and some of those methods are equally as effective as what is explained above. The reality is that any trading system can be a great one if the trader proves to be profitable with it over the long-term (even if the system involves trading by the cycles of the moon).

As such, we would never imply that our system is absolutely the best way to manage stops on winning swing trades. But what we truly love about our exit strategy is its utter simplicity; simple trading strategies are the easiest to follow and thereby profit from. Why complicate a technique that has already been proven to work so well?

By Deron Wagner, Founder and Head Trader, Morpheus Trading Group