How to Set Profit Targets in Trading

Once you are in a trade the question quickly rears its head:

How and when do you get out of the trade at a profit?

Setting targets has to be one of the most important elements of your trading strategy.

1. Targets can be time-based (”I’ll stay in the trade for three weeks”)

2. Technically-based Depending on Your Trading System

3. Profit-based (”I’ll get out when I have an open profit of  50K INR)

4. Price-based (”I’ll get out of the trade when it reaches a certain price.”)

 

Of the  methods each has some advantages and liabilities. Technical exits are always available and remove the element of personal judgment, but work well only in strong trends, cause losses in congestion, and almost always leave a lot of money on the table. Time-based tools are helpful at times but just as often are net losers, and so shouldn’t be seriously considered as a solo tool. Profit-based exits can train a trader to take frequent profits but what happens when the trade continues far beyond your pre-determined exit point? This violates one of the basic rules of trading: let your winners run.

 

 

 

The best means of exiting is to set price targets but only when these are soundly based in the market structure and reflect the market’s existing support and resistance matrix. If your trade plan takes into account the natural support and resistance of the market then your target will be sound and your chances of taking out all that the market offers is far higher then with arbitrarily chosen, fixed profit targets (which tend to be emotionally driven) or a technical moving average tool (which by definition is compelled to leave a lot of money on the table).

 

 

 

How do you set profit targets according to market structure instead of an arbitrary dollar objectives? For some this is a difficult question but for the trader who has developed an understanding of multiple time period structure and the ability to project current support and resistance levels forward into the future, setting targets is easily done. The basic technique is to use your higher time-period support and resistance levels (this should usually be one time-period higher than your trading time-period), and to set your target at the next logical support or resistance level beyond the current price.

 

 

 

Technical analysis explained this as follows: Suppose you are day-trading the Nifty contract. You are using a five-minute chart and take a position using your favorite entry tool. The market starts to move in your favor of 30 Points and because you have put on a position with five contracts you quickly accumulate a profit of Rs 7500. You are pleased and feel a bit greedy and that makes you want to grab profits quickly, especially as you see a slight retracement in the five minute chart. But, knowing that market structure is always at play, you step back for a moment and take a look at the daily and weekly charts. On your charts you can quickly see that your entry was close to daily and weekly support, at the bottom of the daily envelope and close to the weekly envelope bottom as well.You set a price objective at the daily resistance and make an alert to sound when that is filled, so that you can take profits there. You can then further assess if the market will reverse and move back to the original support level or pause and continue to higher level of resistance.

The point is that when watching market structure as opposed to arbitrary dollar value price targets you always have a handle on what the market is doing. As a technical analysis explained course teaches, you are in full control because you are aware of the structural goal at all times as the market moves between its higher time- period support and resistance levels.