‌

As we always say, “plan your trade and trade your plan”. It is important to have a trading plan before you enter a trade and stick to it until you exit the position. It helps to keep you rational—the last thing you want is to let emotions control your trading.

That’s why a lot of swing traders develop their own trading setup to enter and exit positions, many of which involve technical indicators. So, how do we incorporate technical indicators into our exit strategies for swing trading? Let’s dive in.

Finding an exit with MA

An exit signal (for long positions) can generate when a stock price drops below the moving average (MA), or a shorter-term MA drops below a longer-term MA.

Swing traders can customize a technical signal alert to monitor exit points, for example, a price crossing below the 20-day MA. Some may use EMA and some may set a shorter period based on their trading strategies.

Let’s look at an example. Suppose a swing trader opened a long position in an ETF at $325 observing that the price moved back above the 5-day MA. Worrying that the market may tumble due to unexpected news, they set a stop order at $315, which was the previous low. Meanwhile, they set an MA alert so that they will be informed immediately if the price drops below the 5-day MA.

Receiving the alert, the trader may exit the position immediately at $365, or they may wait for the 5-day MA to cross below the 10-day MA to confirm the downtrend once more, exiting at $350.

Finding an exit with RSI

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and size of price changes. The higher the value, the stronger the momentum. A 14-period is often the default setting for RSI, but investors can extend or narrow the timeframe according to their investment horizons.

Let’s set a 7-period RSI and see how swing traders find an exit with RSI.

Swing traders may choose to close a long position or open a short position when the RSI drops back below 70 after it stays above it for some time.

Suppose a swing trader opened a long position in an ETF following a bullish MA crossover. They set a sell stop order at $305 to control losses at 3%. Meanwhile, they set an alert to be informed when the RSI drops below 70. When the alert is triggered, they observed that both the price and the RSI value are descending, and the price has dropped below the 5-day MA. The trader might close their position immediately.

Finding an exit with the Stochastic Oscillator

The Stochastic Oscillator measures momentum to predict potential price reversals. Similar to RSI, a Stochastic Oscillator level above 80 is usually considered overbought, and a level below 20 is considered oversold.

Swing traders usually look for bearish crossovers in which the K line makes a significant cross below the D line to exit a long position in the overbought area.

Suppose a swing trader entered a long position at $320. He placed a stop order at $315 to cover his position and waited for the K line to drop below the D line to take profit. When a bearish crossover was formed with the Stochastic Oscillator still above 80, he observed that the RSI was also showing downward momentum. The trader decided to exit immediately at $365.

The bottom line

While there are many ways to develop our own exit strategies in swing trading, it’s important to consider stopping losses. There are more technical indicators that we can use to identify exit points other than the three we discussed above. Double check the exit signal with different indicators and develop your own trading setup over time!