I sometimes get emails from subscribers who want to know whether
I set targets on positions I enter and, if so, how I establish the
target. If the question means do I set a target that once hit will
result in my exiting the position, the answer is no. For example,
suppose I am in a bullish position in XYZ that I entered at $20 and a
target was set at $25. If the target is hit, what is to say that the
price will not continue to go up? If I exited at the target and the
price went to $40, didn't I just cut my profits? The objective for
successful traders is to cut losses, not profits, and to let profits
run. How can I let a profit run if I sell the stock when it hits a
target?
Targets do have a place in my approach. I use them to calculate
an initial potential reward to risk ratio. Using the same XYZ
example, above, I know where my initial exit will be when I enter a
position. I want it to be close to my entry price and I want it to be
clear. The clarity can come from a break through a support level, for
example. Resistance can supply the target. Suppose I buy XYZ at $20
and my pre-determined exit if the play goes south on me is $19.
Resistance in this example is at $25 so, in a sense, that is a target.
Now I can see that my potential reward to risk ratio at entry is 5:1.
Pretty decent reward to risk, but does that mean I should exit if the
stock hits $25? Not for me. I don't want to remove the possibility
that the price can continue up so instead of exiting at the target, I
would move my stop up behind the price and as it got closer to the
"target" (resistance in the example) I would just move the stop
tighter. If I get stopped out on a move back from resistance, that's
fine. I would have my profit and would not have cut my profit. If the
stock moves up through the target, I would still be in the position
and could continue to move the stop up behind the move.
In my opinion, exits are much more important than targets. We
only realize our profit or loss when we exit the position. If we exit
properly, we do what we should -- cut our losses and let our profits
run. Unfortunately, many retail traders are unsuccessful because they
do just the opposite--cut their profits and let their losses run.
I want to thank the many subscribers who have bought my book,
"Trade Your Way to Wealth." Last Sunday after only a week or so on
the market, it hit #3 on the best seller list at Amazon for stock and
option trading books. I hope those of you who have received your
copies are enjoying the book and finding the information helpful. I
tried to distill a lot of my own learning and experience into
something readers would find valuable in their own trading without the
necessity of re-inventing the wheel. Thanks.
Good Trading!
Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader
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