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Forex Target Trading: What Is It and How Does it Work?

   

forex-target-trading

Target trading is one of the most popular forex trading strategies. If you can identify how the market is trending and anticipate how prices will move, you can use that information to preemptively establish profit-taking points, or targets, at which to exit or partially exit your position. 

A grid trading strategy is a common form of target trading in which traders preemptively create conditional stop entry orders and set a profit target for each pending order.

Why Trade with targets?

Setting profit targets before you enter a trade forces you to preemptively assess risks and rewards. By establishing a target, you identify a realistic profit-taking value and, therefore, know the risk-to-reward ratio before entering into a position. An ideal profit target is realistic and represents a juncture at which risk and reward are relatively balanced. That said, profit targets also limit potential gains by exiting you from the trade at a predetermined point, regardless of what happens after that target is met.

In high-risk trades, profit targets work to lock in profits at incremental points, thereby limiting potential losses. Some traders bookend trades using both profit targets and stop-loss orders to limit losses in the opposite direction in the event that price moves against them rather than toward the profit target. Other traders choose to use conditional orders. In other words, if the price reaches a stipulated value, then it will trigger a conditional order and enter them into a given position.

What indicators can you use in target trading?

Target trading makes it easy to orient your trading activity around specific price levels you have decided to target in your trading strategy. While chart patterns and other information can be used to project where and when a currency pair’s price might land, a number of technical indicators can help identify the right points to enter and exit a position.

While the list below is by no means exhaustive, you may want to consider the value of using any of the following indicators:

  • Fibonacci levels: These levels make it easy to plan trades around extensions and retracements to these widely used levels. Target prices and stop-losses can be placed just above or below a target price.

  • Relative strength index: While RSI-based recommendations might not always align with the target price you’re seeking, RSI can help you assess the likelihood of reaching that target—or whether it’s wise to exit your position early before prices change momentum.

  • Moving average convergence-divergence (MACD): Target prices can be accounted for alongside price momentum by watching for MACD crossovers. When the MACD line crosses above the signal line, it can indicate a potential price swing and motivate an open position. Conversely, when the MACD crosses below, it can signal an impending price reversal that could cost you to fall short of your target—or, if you’ve passed that threshold, provide timely encouragement to exit and claim your profits.

Where do you place profit targets?

Targets can be placed in a few different ways. The most popular method involves identifying support and resistance levels and placing a profit target at the resistance value and a stop-loss order just below the support value.

Support and resistance levels can be identified in a rudimentary way by placing a trend line across the peaks and dips on your price action graph where the price reverses in the opposite direction.

 

It’s also possible to establish support and resistance levels and place profit targets using a pivot point analysis. A pivot point takes the average high and low closing prices from the previous day and uses them to establish a current trading range—that is, support and resistance levels. In a strong trend, the price will continue to break its previous resistance threshold, creating a stair-like pattern as illustrated.

By placing your profit target at the established resistance level, you’ll lock in profits each time the price breaks this range, thereby continuing the trend. Using the width of the current support and resistance range as a guide, traders also attempt to predict secondary support and resistance levels at which to place new profit targets and stop-loss orders.

It’s also possible to place profit targets using the average true range (ATR), an indicator that measures price volatility. ATR values reflect the average change in price that a currency pair experiences in a single day. By adding the ATR value to the current market price, you can set a realistic profit target for the upcoming day.

Target Trading: When should you walk away?

Targets are incredibly valuable in orienting your trading strategy and giving you a firm target to pursue instead of getting charmed by the allure of endless price increases and trading profits.

While target trading can keep you grounded, it can also trap you into an open position against your own best interests. Not every price target is reached by every trade—and if you don’t know when to cut your losses, you could end up getting burned and seeing modest profit opportunities dissolve into nothing.

But even when walking away from a trade, you still have options on how to exit this position. If you believe it’s time to reassess your trading strategy, consider the following steps to mitigate your risk and close out a position:

  • Account for the cost of pips in forex prices when determining your break-even point.

  • Use a stop-loss or trailing stop-loss to lock in profits.
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  • Sell off a portion of your position to claim profits and reduce your risk if a price swing occurs.

  • Monitor technical indicators closely, and exit if your available evidence is pointing to impending losses.

What types of stop-losses should you use in target trading?

Whether you reach your target price or decide to sell off short of that goal, a stop-loss is your ticket to mitigating risk and preserving the value of your account balance. There are three types of stop-losses to consider as you plan out your target trading:

  • Trailing stop-loss: With a trailing stop-loss, the trader continues increasing the price point at which a stop-loss is set, locking in profits as the price movement for a currency pair moves in their favor. This protects you in the event of a sudden downturn, ensuring that your assets are sold at a price that guarantees a profit.

  • Incremental stop-loss: If you want to balance profit taking with holding a position to capitalize on future growth, incremental stop-loss orders can be placed to gradually reduce the size of your position as profits are achieved. For example, you can sell off a certain amount of your position once you reach the target price while holding on to some of that currency to see if the price continues to climb beyond your target.

  • Stop-and-reverse order: If prices experience a sudden swing, a stop-and-reverse order lets you exit a position at a set price, insulating you from the dramatic loss in value you would otherwise suffer. However, you can then set a subsequent buy order at a specific price level that lets you reenter the position as the currency pair’s value recovers.

Although support and resistance levels, pivot points, and the ATR can all help you determine profit targets, it’s important to remember that these are just estimates. In order to place them more effectively, you must understand the market and be able to recognize the strength and direction of the current trend to identify when a reversal may be imminent.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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