Lesson du Jour
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:
- Fib levels, especially the 50% and 62%, but on larger
trends, or long term charts the 38% will sometimes be influential
- 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)
- 20 day moving average, which is a "moving" trendline.
- 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.
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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

The charts in this publication are all made using Gecko's Track 'n
Trade charting software. You can get a demo for free
here.
Energies Market
Overview
The Energy complex has remained rather passive the last week or so. After a
big decline a few weeks earlier it seems that the market has put on the
brakes as it decides what to do next. I thought that we'd see a bigger
pullback, but it hasn't materialized – yet. I also thought that last week's
run lower Wednesday might be the resumption of the downtrend, so we sold it,
but it quickly died off and now we're back above support.
The downtrend is still in good shape and will probably continue for the
longer term. RSI is fairly neutral, which is also a good sign for the
current trend. In spite of these conditions however, prices continue to
honour the support at/near the low. I thought about shorting the market(s)
on Monday, as that is usually a good opportunity to get into the big ranging
markets; however until we see something trade closer to the proven support
level I'm going to stay cautious.
Mini – Natural Gas
A good start to our first mini-Natural Gas trade last week as we sold the
market after it showed us resistance at 8.21. How did I know the market
showed me resistance? Because it traded lower the next day, that's how.
When you're trading a mini contract it is important to take your cues from
the larger contract. Looking at the mini-NG you'd never really get a feel
for what is happening in the market; however when you look at the full sized
contract you can easily see that the market is in a rather large, long term
decline. This is not (or was not) as easy to see on the mini contract chart.
Now that the market is underway, we might be in for a bit of a run as DMI
continues to look strong and might even be picking up steam. If you
tightened your stops above the intraday resistance at 7.50 for Friday, then
you're already flat; however if you're still in the trade you might consider
bringing stops in above Friday's high for Monday.
The "ideal" stop is still above Thursday's high, but with over $1000 in
profit as of the close, that might be a touch too much risk to hold.
CONTINUATION of Short December mini-Natural Gas from 7.79
Exit Order: 7.55
Approximate Risk Exposure: $0 per contract
Profit Target: 7.03
Approximate Potential Profit: $1900 per contract
RRR: n/a
Degree of Risk: Moderate

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