One of the main things that’s hammered into financial market participants’ minds is how to determine, and what to do, if you’re wrong. Something that I see discussed less frequently is what to do if you’re right. Now this topic encompasses a lot of material depending on how you think about the question, but for this post I want to discuss price targets.
If a stock starts moving your way, how do you know where to take profits? Unless your stock is on a one way trip to the moon, you’re going to need a plan for where to exit.
To me, a price target is defined as an area where the risk/reward of a stock is no longer in my favor to the degree I’m comfortable with.
There are a variety of ways to determine price targets including measured moves, Fibonacci retracements & extensions, prior support & resistance levels, levels on indicators, etc… There is no right or wrong way to determine price targets, it depends on your strategy, but it’s important to have some sort of method.
For me, I like to use measured moves, prior support & resistance levels and Fibonacci retracements & extensions to determine price targets.
Depending on the trades thesis, I think it’s important to have targets on each timeframe so you can avoid sitting through all the counter trend moves along the way. I look at markets on a weekly and daily timeframe, so I have structural targets (weekly) and tactical targets (daily) for every symbol I follow.
Structural Targets: I use the weekly timeframe to determine the long term trend and health of the overall market. This is helpful in identifying opportunities for investors and position traders with longer holding periods. It is also helpful to know what is going on on a higher timeframe when looking at the daily for tactical trading opportunities.
Below is a weekly chart of APPL. The trend was clearly higher with price above the uptrend line from the ’08 lows and a rising 200 week simple moving average. When prices broke above the ’12 highs and made new all time highs, I used the 161.8% extension of the ’12-’13 pullback to determine where I though prices would head next. Since then, prices hit my target so I’d be out, waiting for more consolidation or a pullback before getting involved again on the long side. Does this mean that I think AAPL’s major uptrend is in jeaporady? No, but the risk/reward at current levels is a lot less appealing up here than when it broke out.
Tactical Price Targets: For me, this is the daily timeframe. It helps me identify trading opportunities along the way as the stock heads toward my structural target on the higher timeframe.
Below is a daily chart of AAPL. On the daily we were in an uptrend channel from the June ’13 lows and broke above the ’14 highs in early February. The obvious target was at the top of the channel near 130, but I also found that the 161.8% extension of the Nov-Jan pullback was at 129. For me, that was the area where I felt the risk/reward on the long side would no longer be appealing. We got a slight overshoot of that target and that’s fine, I’m not trying to catch 100% of the move, just the middle of it. If you took profits up there, you left a little money on the table, but at least you didn’t have to sit through this downside consolidation.
Having tactical targets also helps allievate the less thought about risk of opportunity cost. If you choose to sit in a stock that’s consolidating, you lose out on the opportunity to put money to work elsewhere in better risk/reward opportunities.
At the end of the day if you happen to be right on a stock, make sure you have price targets that get you out with some gains as taking round trips can put a real strain on your trading performance and mental capital.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.
Tags: $STUDY $AAPL