The LCG Blog

Light and informative stories from LCG and the world of online trading.

CFD trading is high risk and may not be suitable for everyone.
Three Ways to Set Profit Targets

Learning how to wisely manage and exit trades is critical to trading success. Unfortunately, it is a skill often neglected or overlooked. This article will give you three solid strategies for setting profit targets.

How many times are traders confronted with something like the following scenario? A trade is placed and the market moves in the right direction. Within a short period, the trader is up 20 points in the trade…And then the thought hits: What to do now?

Opening a trade is only half a trading strategy. A complete trading strategy includes an exit plan in addition to an entry plan.

Strategy 1: Pivot Points

Being aware of the daily pivot point levels – the daily pivot point, resistance levels R1, R2, and R3, and support pivot levels S1, S2, and S3 – is important regardless of trading strategy. The reason is simple: So many traders make trading decisions based, at least in part, on pivot levels that they often end up acting as support or resistance.

Looking at the nearest pivot level for a profit target is reasonable. So, for example, if buying into a market around the S1 pivot support level, possible profit targets are the daily pivot point (conservative) or the R1 resistance level (more ambitious).

Look at the action in EURCAD during 13th April in the 15-minute chart below. The daily pivot point is marked with blue (P), resistance and support levels are marked with green (R1) and red (S1)  lines respectively. In the morning the price moves downward but bounces off the support and breaks through the pivot point and continues up to almost reach the resistance level. For this reason, pivot levels tend to make good profit targets. Learn more about support and resistance levels.

EURCAD 15-minute chart with pivot levels

Strategy 2: Round number “jumps”

For day traders, good profit targets can simply be the next round number price point in the day’s action. For example, in the forex market, major currency pairs often seem to move in the following “jumps”:

  • from the “00” level to the “20 level” (e.g., 1.3500 to 1.3520)
  • from the “20” level to the “50” level
  • from the “50” level to the “80” level
  • from the “80” level to the next “00” level

For example, if selling short EURUSD at 1.2150, a reasonable profit target might be near the 1.2120 level. If that price level coincides with a pivot level or a major moving average, then the market is more likely to at find some support there.

Strategy 3: Moving Average Violation

Long-term traders, those who look to take a trading position and ride a long-term uptrend or downtrend, have a more difficult time identifying profit targets. For example, if riding the long-term uptrend in GBPUSD, where could a trader look to exit? 1.50? Then again, it might go to 1.80.

When trading a long-term trend, rather than having a specific profit target in mind, an alternative exit strategy is to stay in the trade until the market’s price action decisively dictates the trend is changing. In a strong, sustained uptrend, price generally tends to stay above major moving averages such as the 50-day or 100-day moving average. A good exit strategy can be to use a trailing stop adjusted to just below whichever major moving average is supporting the uptrend. A violation of that moving average support, meaning price breaking below it, especially on a daily or weekly close basis, may be a signal that the uptrend is ending and the market is turning to the downside. Below we see an example on a 4-hour Wall Street chart, the price rises in a steady trend during january and when it crosses the moving average (the blue line, 50 periods) it is a clear signal that the up trend is over.

Wall Street 4-hour chart with moving average

Getting a good trade entry is only the start of making a good trade. Good trade management, including having a solid strategy for profitably exiting your trade, will go further toward making you a consistently profitable trader. Read more about how you can trade with LCG.

 

Any information provided is for educational purposes only and does not take into account your personal circumstances (for example your available funds and risk appetite). CFD trading carries a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved. You should seek independent financial advice, if you feel it is necessary or appropriate. 

3-4-2019

The 3 biggest factors for choosing of broker
The 3 biggest factors for choosing of broker   Especially when you first start trading, but even as an experienced trader there are 3 boxes that any online broker should tick. There are many considerations for your choice of broker. These might include tradi… Read more

1-4-2019

Client sentiment and the use of data in trading
Data is a bit of a dirty word at the moment. The Cambridge Analytica and Facebook scandal has put a spotlight on consumer data and forced every one of us look carefully at how our online data is shared. But what about the use of data when it comes to trading? … Read more

29-3-2019

The Basics of Harmonic Patterns & Harmonic Trading
Harmonic Trading is a way to analyse financial markets by recognising specific price patterns and the alignment of Fibonacci ratios to determine potential reversal points. This methodology assumes that trading patterns or cycles, like in life, repeat themselv… Read more

27-3-2019

How to Avoid Chasing the Market
Chasing the market – jumping in after a market has already made a substantial move in one direction or the other – is a common way traders come unstuck. It is one of those “classic trading mistakes” that professional (winning) traders religiously avoid. A Com… Read more

25-3-2019

Moving a Stop-loss to Protect Profits in Winning Trades
Once a trader has executed a trade, and it becomes profitable, his primary goal is to keep as much as the profit as possible. The last thing a trader wants is to see profits drop, vanish or turn into a loss. To prevent this from happening, the trader can move … Read more

21-3-2019

Pros & Cons of CFDs
What are CFDs? CFDs – short for ‘Contract For Difference’ are a popular form of derivatives trading. The word ‘derivatives’ can have some spooky connotations – weren’t they what caused the financial crisis in 2008? Yes and No. Complicated structured products … Read more

15-3-2019

Three Ways to Set Profit Targets
Learning how to wisely manage and exit trades is critical to trading success. Unfortunately, it is a skill often neglected or overlooked. This article will give you three solid strategies for setting profit targets. How many times are traders confronted with … Read more

12-3-2019

Japanese Candlesticks to spot market reversals
Candlestick reversal patterns are one of the most commonly used technical trading signals in forex trading. While they do not represent a magic bullet to forex trading millions, over time candlestick reversal indications have been found to be an often reliable… Read more