Stock Trading

Target Prices

Sometimes in trading it is easier to see where a stop should be placed to limit the potential downside of a trade, than it is to find a suitable target price for the trade when it goes our way. However, since the idea of trading is to make money, it's important that we set realistic target prices, as it is the only way we can determine our reward-to-risk before entering a trade in the first place.

Deciding where to place a target for a trade is as much art as it is science, unfortunately. If only we just knew where the top was going to be! There are some strong clues that we can glean from the charts, though, so let's take a look at some of those here.

Previous High

This is the easiest, and probably the most reliable one of the bunch. It doesn't work for every trade, though, because there isn't always an old high for us to target. Sometimes we're busy making new highs already. But, in general, if a stock has a previous high, then pulled back from there, it can be assumed that that level will provide selling pressure. Buyers will press the stock price up to that level, but as it approaches it will be met by sellers who also recognize the importance of this previous level of resistance. When choosing a previous high as a target, it can be a good idea to place your target sell order a bit below the actual high itself.

Resistance Levels

Oftentimes a stock will test a particular level numerous times, rising up to it, then falling back, then rising to test it again before being pushed back. This process can repeat any number of times, and creates what is called a resistance level. This becomes an obvious level to target.

The thing with resistance levels is that eventually they are broken, and when they are they create breakouts, which can be explosive moves to the upside. When targeting these levels I generally prefer to follow the trade up by increasing my stop behind the trade instead of trying to sell the top tick. This system won't get you out of the trade at the top, but what it will do is give you a chance to still be participating in the even that the stock does indeed push through resistance, in which case you can continue to profit.

Channel Width

When a stock trades in a channel for a while, bouncing off a top resistance level, and rallying again off a bottom support level, we will often trade the channel breakout. This is the point at which the stock finally breaks out above the previous resistance level. When this happens what we will often see is a rally that mirrors closely the width of the channel that it just broke out of. For example, if a stock were bouncing between $90 and $100 for a while, then we bought the breakout at $101, we could estimate that the target for the trade would be $110 based on the $10 width of that channel.

Previous Run's Length

When a stock is in the midst of a strong run higher it will often pause for a period of time. This sideways movement is called a consolidation. When that consolidation is complete and the stock begins to move higher again what we see quite often is a move that closely mirrors the previous run higher. From that we can get an estimate of where we think this next move will end.