Question:
Can you suggest how I should set profit targets and stop loss orders on a
trade?
Answer:
Wow, this is a big question! In fact, you could write an entire book dealing
with setting profit objectives and stop losses. Let me give you a few
guidelines to follow that might help you out.
First, setting profit objectives. Being a support and resistance technician
I am always looking for support or resistance areas that are likely to
reverse the market. If you are trading a reversing market, one that seems to
be retracing part of a previous move, the easiest way to set a target is to
use Fibonacci ratios (38, 50 and 62%).
The market will have a tendency to move towards these areas before reacting.
By concentrating on significant support or resistance near these retracement
areas, I can narrow down my search for prices that are likely to affect the
market.
If you are trading a trending market, then you will have to look back in the
history of the chart, sometimes consulting a longer term weekly or monthly
chart, to find areas of support or resistance that look like they might
affect the market.
If the long term chart is also retracing a previous move, you can once again
use Fibonacci ratios to give you an idea as to where prices are heading.
Keep in mind however, that the longer term charts will take longer to reach
their objectives than the daily chart.
When choosing a stop loss, I will again focus on using support and
resistance to help me find suitable areas to limit my risk. In a trending
market, the best place to trail a stop loss is beyond the pullback areas
that develop as the market trends. These are significant as they are proven
areas of support or resistance. Unfortunately, the pullback moves can
sometimes be quite large, and leave too much money at risk.
Therefore we sometimes need to find closer support or resistance lines to
use as stop losses. Occasionally, the high (or low) of the day will form a
good stop loss area, especially if it coincides with other support or
resistance. This is usually the least amount of money you will be able to
risk on a trade, without having to increase the riskiness of the trade by
placing exit stops within the daily range.
If you do need to enter the daily range, in order to minimize the risk
enough to make the trade worthwhile, consider placing your exit order beyond
the closing price. The closing price will often form a support/resistance
area as the market winds down, so this can be an alternative; however be
aware that placing your exit order within the market's daily range does make
you more susceptible to whipsaws.
Erich
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Got a question that
needs answering like an itch you can't scratch? Send it along to me at
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you.
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Currencies Overview
We're still on the lookout for a trending market in the Currency
complex. Most of the currencies are stuck between support and resistance
which has resulted in a lot of choppy trading. We did buy a breakout in
the Yen last week and the trade continues to show promise right now. We
were also looking at buying the Canadian Dollar on a breakout higher;
however we have trendline resistance just above the current highs, so I
think I'll put that one on the back burner for now. The British Pound is
showing promise of another sell, but only if we get another poke at the
194 support.
Japanese Yen
The Yen showed signs of changing trend last week as we saw rates break
previous resistance at 8425. I tried to place my entry a little further
away to avoid a whipsaw trade. The Yen found our entry on Friday when
rates just poked through the resistance area. While the small session is
a little disconcerting, I'm confident that we are on the right side of
the trade. The problem now will be trying to ride out any price swings
over the next few sessions.
Original stops were put at 8377, just below the 8380 resistance, and
this is probably still the best placement for the early part of the
week. It's always a touch balance allowing the market enough room to
sort itself out with not placing too much money at risk. As a result
I'll try to stay limber with our exit orders for Monday.
Our first profit target continues to be resistance at 8720, but we need
to be careful around the 8600 line. You'll see some resistance here from
the chart as well as possible trendline resistance at this point.
CONTINUATION of Long March Japanese Yen from 8437
Exit Order: 8377
Approximate Risk Exposure: $750 per contract
Profit Target: 8719
Approximate Potential Profit: $3525 per contract
RRR: 4 1/2:1
Degree of Risk: Moderate to HIGH
US Dollar Index
From a technical standpoint selling the US Dollar Index looks like a
very promising trade for this week. We have a market that is currently
in a downtrend according to DMI and our 20 day moving average line. We
have confirmed support at last week's low of 8383. This means that a
move back through this support level shows downward momentum and should
be sold.
Exit stops will go above/near the resistance at 8425, which is close to
Friday's high. This is another reason I think we could see rates fall
off from here. Remember, old support becomes new resistance! The first
profit target is support at the contract lows, but we could see it head
lower still!
About the only thing I don't like about this trade is that we are
nearing expiration. This means we will have to eventually roll into the
June contract, but since it is currently too thin to trade we'll have to
pony up for another commission instead.
SELL March US Dollar Index at 8377
Exit Order: 8423
Approximate Risk Exposure: $460 per contract
Profit Target: 8213
Approximate Potential Profit: $1640 per contract
RRR: 3 1/2:1
Degree of Risk: Low to 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. The rest of the Markets
in all sectors are covered in the Subscriber Edition.
Grains Overview
The Grains were pretty active last week. We got filled in Corn and Soybeans
on a strong rally going into the weekend. Hopefully this will spill over
into this week as well as right now there's not much we can do with our
stops. Our Oat trade is showing signs of weakening so we might have to take
steps to protect ourselves.
Soy Meal is still looking strong, but now we're in a position where we have
a reasonable amount of profit into the trade and we need to decide whether
we're going to maximize our profit or try and trail a stop loss order.
Soybeans
While Soybeans and Meal will move together, I'm going to try and be a little
liberal with my Bean stops and hopefully this will allow me to pick up the
developing trend. I hope. Prices have been trending for awhile in this
direction (since January 10), and while we've had the odd pause in the
rally, we haven't seen any sort of pullback, so we might be due.
If I can at least get one more day higher so that we can get the trade
at/near breakeven I'll be happy, but the market is overbought, so a pause is
likely to happen soon.
CONTINUATION of Long May Soybeans from 778 1/4
Exit Order: 767 3/4
Approximate Risk Exposure: $525 per contract
Profit Target: 849 1/4
Approximate Potential Profit: $3550 per contract
RRR: 6 1/2:1
Degree of Risk: Moderate to HIGH
Metals Market Overview
Not much to report in the Metal markets – at least nothing as far as the
small spec trader is concerned. Silver continues to look bullish as does
Gold, but Silver's ranges and nearby resistance make Gold that better market
to trade, at least from a technical standpoint.
Copper prices are turning a little more bullish, but the ranges and lack of
momentum are enough to make me avoid this market right now. We might have a
tradable formation here in a few days, but nothing right now.
Gold
Gold prices are in trouble. The market continues to battle the resistance at
675 without being able to break through. Yes, there is the odd stab through
resistance, but prices have been unable to close above the resistance, so it
is still intact.
Momentum has been slowing as well as RSI has been overbought and is now
showing divergence. This means that a reversal could be coming very soon.
Since the market is still in an uptrend however, my preference will to buy
on a breakout through resistance. The only danger in this trade is that we
could see a false breakout, but given the downward pressures, I would think
that a rally through resistance would have to have enough momentum to carry
on higher.
BUY April Gold at 678.5
Exit Order: 666.5
Approximate Risk Exposure: $1200 per contract
Profit Target: 725.0
Approximate Potential Profit: $4650 per contract
RRR: 3 1/2:1
Degree of Risk: Moderate to HIGH
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care, and good trades to you for the coming week!
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