& Using Profit Targets - Defining
Strategies For Success
Targets are often tough to pin-point for
most traders. It would be great if we
could always know when and where a trade
will hit a certain price, but that is
not the case. We, as professional traders,
have to attempt to use our best judgment
to determine where our best opportunity
for profit targets lies. Even then, we
have to be prepared for the unexpected.
a profit target levels can sometimes be
frustrating. The purpose of choosing a
profit target it to identify a price level
where you would feel comfortable EXITING
the trade. This level should be something
that would be rather easy for the market
to reach and not "too far away from
current price". We want out trade
to be successful - right? So we need to
identify a profit target that we can live
with and the maket will be able to attain.
common ways to establish a profit target
are as follows...
2 or 3 times the average candle range.
This concept assumes the market will continue
the expected trend for about 2 or 3 time
the average candle range. So if the average
candle range is $0.50, your profit target
should be somewhere between $1.00 ~ $1.50.
Use Fibbonacci levels to establish a profit
target. This method uses the "last
trend" to determine a potential profit
target for the future trend. I suggest
using a Fibbonacci level LESS than 50%
as your initial profit target. Anything
greater than or equal to the 50% retracement
levels is considered a pretty big move
(in most cases).
Percentage Price Swings - often, professional
traders use percentages of current price
to establish stops/profit targets. The
only suggestion I have when using this
method is to compare the percentage level
with #1 above. Often, normal price swings
are smaller than a 1 or 2% price swing
- or visa-versa. So, if you traded a $15.00
stock, 1% = $0.15 (rather small - right)??
Let's assume the average candle range
was $0.27. By combining the first and
second methods of determining a profit
target shows the percentage type is too
small and the candle range might be a
bit too large. Thus, we might decide on
something like a $0.35~0.45 profit target
- about 3%.
Support/Resistance/Trend Channels - using
these levels is another common form of
identifying price targets. For example,
if you can identify a support level or
resistance level that the chart has recently
bounced from, this level MAY be a decent
target in the future. I like to use these
when the market is moving "counter-trend".
For example, let's assume the market is
in a downtrend and it forming a new BUY
SIGNAL. I would normally look for a price
move up to a resistance level or downward
trend channel level. Why - because this
is likely where the upward price swing
will end and I want to try to maximize
my potential with this trade.
to do when your profit target is reached
your profit target is reached (first,
pat yourself on the back for a great trade),
then decide how you want to address the
next phase of your trade. The reason you
had a profit target in place was because
you "needed to know exactly what
to expect from your trade" - remember,
we planned the whole thing out before
you ever entered the trade. So, you planned
on reaching this profit target, now you
need to execute a portion of your strategy.
process needed when your profit target
is reached can contain any or all of the
some or all of your profits from the trade
Exiting 50%+ of your position - this process
it taught by the Japanese as a "smart"
technique. After your profit target has
been reached - it is wise to pull 50~75%
of your original trade off (to lock in
the profits), then continue the trade
with the rest. Of course, this means you
still have to manage the remainder of
your trade and adjust your protective
Exit ALL of your trade and wait for the
next one - no fault in taking this action.
You made a calculated "guess"
that the trade would reach this level
- and it did. So, closing the trade out
at this level means you were 100% successful.
Now, you should be ready to do it again
Leave your trade in place and adjust your
protective mechanism - a bit more risky,
but still some traders may choose this
process. I like using #1 or #2 (personally).
But adjusting a stop to lock in profits
at this stage of the trade is very important.
If you leave your trade in place and DON'T
adjust your stop is somewhat foolish.
You just earned that profit - don't you
want ANY OF IT?
existing protective levels
Adjusting your stop to break-even or better
- this is the most common process for
when your profit target is reached. The
purpose of this it so adjust your protective
stop to "lock in" a break-even
(or better) price level. If the market
turns against you right after your profit
target is reached, you'll at least get
out of the trade with little or no loss.
Adjusting your stops tighter, but still
below breakeven - sometimes this happens
because the price action of the chart
prevents you from adjusting your stop
to a level that is likely to be hit immediately.
Remember, we are trying to use our stops
as a protective method to prevent unwanted
losses "IF" the market turns
against us. But we also want to try to
let the profits run. So, sometimes we
have to adjust our stops to levels that
are better, but not at or above break-even
levels yet. If we give the market some
extra time, we'll likely see additional
opportunities to mofe our stops to above
your trade for future potential activity
Now, the continuing saga or our trading
experience.. Yes, we hav to continually
evaluate our trades and the potential
of our trades. We have to "manage"
our trades - is a better way to put it.
This process is simple, we need to reconfirm
our actions, the potential for the markets
and the location of our stops and profit
is no easy way to trade - sure everyone
will tell you they found the "Key".
But I've learned the best key is "Knowledge"
and "planning your trade". If
you know what to expect before you enter
your trade, then you can make a decision
based on the parameters presented before
you - you know what your risk is, where
your profit targets are and what the market
conditions are. Thus, you know how much
you could loose or gain before you start
the market hits our profit target, we
need to evaluate "where" we
feel the market can go in the future.
I like to trade Weekly stock charts and
often find I'm holding positions for many
weeks. Most of my clients are day-traders
or short-term swing traders - so they
may only hold positions for a few days
(or weeks). The process is identical though,
we have to manage our trades by attempting
to contain our risks while allowing the
trade to mature.
in the markets is something that happens
- remember "Market Breath" and
the fact that markets move in "waves"
(up and down while continuing a trend).
So, sometimes, you might see weakness
in a chart that is actually just a short
retracement or a slight pullback.
suggest traders identify their goals,
then adjust their protective measures
to achieve their goals. If I were a short
term swing trader, I would try to move
my stops to above break-even immediately
after reaching a profit target. If I saw
any weakness in my trade, I might simply
pull the entire trade and consider it
a "good trade". If I could not
stand any additional risks in my account,
I would look for short term "quick"
trades that return 3~7% (if possible)
- but I would be happy with any winning
goal, as a longer term trader, is to contain
my risks (to about 1~2%) and try to let
my profits run. I do this by identifying
support/resistance levels in my trades
and letting the chart work itself out.
Initially, I might have to risk a bit
more (when I first enter the trade), but
if I'm correct, I'll see an "impulse
move" in my favor that allows me
to adjust my stop to reduce my risk. I'll
simply repeat this process over and over
as the trend continues.
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