Question:
How do you arrive at your profit targets?

Answer:
Profit targets are nothing more than subjective targets that the market might stop at. I arrive at these targets using the following tools:

If the market is retracing:

1. Fib levels, especially the 50% and 62%, but on larger trends, or long term charts the 38% will sometimes be influential
    
2. Trendlines, if the market is retracing to a trendline I will assume that the resistance near the trendline will cause the market to react (especially if it's in the direction of the major trend and not the pullback trend)
    
3. 20 day moving average, which is a "moving" trendline.
    
4. The neckline (or full retracement) of the previous move. The reason rounded top/bottom formations are so powerful is that they repeat over and over again. I almost always assume a full retracement past the 62% line, but given the size of the move it might be a very long term target and I'll have shorter term targets in the meantime.

It is IMPORTANT TO NOTE that these tools only help me narrow my search for important support and resistance levels. I do not trade the numbers these tools offer up blindly, but they are helpful for narrowing your focus.

In a trending market:

1. If the trend is strong (ie. DMI is strong or building) I will often opt for trailing a stop. This usually allows me the greatest flexibility in capturing the better part of the move, but will routinely leave a lot more money at risk. October Sugar is a perfect example where we racked up over $2300 in profit per contract before finally getting stopped out, but I was running a stop almost $400 – 500 back, and that's a lot for sugar, but was necessary to "ride" the trend.

2. If the trend is weak I will almost always opt for a profit target. This is any area where the S&R is strong, which is determined by the tools in the manual you got. Essentially it's any area of extreme population, especially if there has been a previous reaction in that area as well.

You might want to consider the size of your account as well. I almost always recommend that small account traders take profit on target when they get it. Sometimes the market will move well past your intended target, but other times it will reverse. More often than not you'll be better served taking profit on target, and when in doubt, that's what you should do.

Remember that it's not the size of the profit that's important; rather it's the consistency in getting the profit. Once you have the consistency part down, the larger profits come from taking more contracts, not making home run trades.

Does that help?

Got a question that needs answering like an itch you can't scratch? Send it along to me at Erich@tradershelpingtraders.net and I'll be happy to try and clear things up for you.
 

A Sampling of the Markets we're covering this week...

Currencies Market Overview

This last week saw some of the currency markets in a bit of a transition. This is rare because the currencies are normally really good trending markets, so once they settle on a direction we can usually expect them to stay on course for a while, but this was not the case.

The biggest reversal out of trend came in the Mexican Peso which we were looking to short below support. The Aussie Dollar also did an about face, but seems to have stalled again, not knowing if it's safe to rally or not.

The EuroFX, Swiss Franc and US Dollar Index were all ranging too wildly to consider trading this week, but the British Pound, which normally follows these markets closely, has made a tighter, more tradable range. The Canadian Dollar is our only open trade that we carried into the weekend, and it still looks promising for the most part. Best of all if you missed the earlier move you might have another chance to get into the trade.

British Pound

The Pound spent the better part of last week hammering away at the 185.30-ish support zone. Friday's session finally saw the market fill the gap that started the week, while once again making a run at support. With such a well defined support area we have a clear line from where to sell the market this week.

DMI shows the market in a good downtrend; however RSI is showing that things are a touch oversold. While this doesn't mean that the Pound will automatically find support, it does make me a touch nervous about selling. I would have felt better if we saw a bigger pullback move, as that would have "normalized" RSI a bit as well, but we might not get it.

We'll have to park a sell order below current support in case we see rates fall off on Monday. Exit stops will go above the intermediate resistance at 186.00, which is tight, but it does help keep risk to a reasonable level. The first profit target is monthly support at 182.50. Coincidentally it is also near the 50% retracement level on the daily chart.

SELL December British Pound at 185.27
Exit Order: 186.03
Approximate Risk Exposure: $475 per contract
Profit Target: 182.57
Approximate Potential Profit: $1687 per contract
RRR: 3 1/2:1
Degree of Risk: Moderate to HIGH

Canadian Dollar

Our Canadian Dollar short is off to a good start, although rates promptly stalled after breaking support last Tuesday. From here the market channelled for the remainder of the week, giving us an opportunity to tighten our stops as well as setting up to add to our existing position, or enter the market if you didn't catch the earlier move.

It is a basic narrow channel formation, which could be bracketed to take the trade on either side; however my own personal preference would be to sell with the trend. Right now I think I'd still be a touch suspicious of any rally attempts, but the support at 8800 is nothing to sneeze at either.

If we do get stopped out we'll still walk with a bit of profit as I've rolled my stops above the 8830 resistance – the top end of the narrow channel. If rates do rally, we should have another chance to short the market, probably off the 8875 resistance, but that's speculating too far into the future for right now. Right now we want to concentrate on managing the trade we have.

CONTINUATION of Short December Canadian Dollar from 8863
Exit Order: 8833
Approximate Risk Exposure: $0 per contract
Profit Target: 8703
Approximate Potential Profit: $1600 per contract
RRR: n/a
Degree of Risk: Moderate

This is only a small sample of the markets we cover!

For a detailed analysis of ALL of the markets, with explicit charts, entries, exits, stops, risk/reward ratio, potential profit, (and much more) please join us at http://www.supportandresistance.com/subscribe.html