Target trading is one of the most popular forex trading strategies. If you can identify how the market is trending and anticipate how price 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 whereby 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.
On 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 price reaches a stipulated value, then it will trigger a conditional order and enter them into a given position.
Placing 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 trendline across the peaks and dips on your price action graph where 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, 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 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.
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.
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.