I sometimes get emails from subscribers who want to know whether I set targets on positions I enter and, if so, how I establish the target. If the question means do I set a target that once hit will result in my exiting the position, the answer is no. For example, suppose I am in a bullish position in XYZ that I entered at $20 and a target was set at $25. If the target is hit, what is to say that the price will not continue to go up? If I exited at the target and the price went to $40, didn't I just cut my profits? The objective for successful traders is to cut losses, not profits, and to let profits run. How can I let a profit run if I sell the stock when it hits a target?
Targets do have a place in my approach. I use them to calculate an initial potential reward to risk ratio. Using the same XYZ example, above, I know where my initial exit will be when I enter a position. I want it to be close to my entry price and I want it to be clear. The clarity can come from a break through a support level, for example. Resistance can supply the target. Suppose I buy XYZ at $20 and my pre-determined exit if the play goes south on me is $19. Resistance in this example is at $25 so, in a sense, that is a target. Now I can see that my potential reward to risk ratio at entry is 5:1. Pretty decent reward to risk, but does that mean I should exit if the stock hits $25? Not for me. I don't want to remove the possibility that the price can continue up so instead of exiting at the target, I would move my stop up behind the price and as it got closer to the "target" (resistance in the example) I would just move the stop tighter. If I get stopped out on a move back from resistance, that's fine. I would have my profit and would not have cut my profit. If the stock moves up through the target, I would still be in the position and could continue to move the stop up behind the move.
In my opinion, exits are much more important than targets. We only realize our profit or loss when we exit the position. If we exit properly, we do what we should -- cut our losses and let our profits run. Unfortunately, many retail traders are unsuccessful because they do just the opposite--cut their profits and let their losses run.
I want to thank the many subscribers who have bought my book, "Trade Your Way to Wealth." Last Sunday after only a week or so on the market, it hit #3 on the best seller list at Amazon for stock and option trading books. I hope those of you who have received your copies are enjoying the book and finding the information helpful. I tried to distill a lot of my own learning and experience into something readers would find valuable in their own trading without the necessity of re-inventing the wheel. Thanks.
by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved
P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!
Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft
To comment on Bill's article click on the "comments" link below.