The majority of traders devote all their energy and resources to finding the ideal starting point and setting the right target. However, failing to set targets can be just as detrimental to your trading performance. Setting clear and realistic targets will help you better manage your risk, focus on the markets and make more money.
Setting Targets: Useful Tips
By having a concrete plan for their goals, Witzel Trading users can bolster their confidence when trading and banish any guesswork from the equation. Here are seven common targets for traders:
A profit target is simply the price level you want to reach before exiting a profitable trade. This target should be realistic and in line with the expected movements of a currency pair or asset. It can be based on technical levels or fundamental analysis. For instance, a trader may set a profit target at the break of an established resistance level. Or, they may use fundamental analysis to determine the potential impact of upcoming news events and set their target accordingly. Setting a profit target is important as it helps prevent traders from getting greedy and taking on too much risk. It is beneficial not only in trading but also in other approaches to making money.
A trailing stop is a type of stop-loss order that moves as the price action moves in your favor. This allows you to stay in a trade longer and potentially maximize profits. Trailing stops can be used on any timeframe, though they are most commonly used on higher timeframes such as the daily chart or longer. A trader may set a trailing stop at a certain percentage or pip distance from the current price. For example, a trader may set their trailing stop at 3% or 30 pips below the current price. As the price moves in favor of the trader, the stop will also move accordingly, allowing them to stay in a trade longer and potentially reap greater profits.
A time-based target is simply a target set in terms of time rather than price. This type of target can be especially useful for traders who are looking to take advantage of short-term market movements. By trading with a time-based target, you have the potential to open up more positions and potentially increase your profits. For example, a trader may set a time-based target of two hours to take advantage of a short-term trend.
A volume-based target is one that takes into account the amount of money that has been traded in a security or market over a given period. For example, if you were trading stocks and noticed that the average daily volume was around 100,000 shares, you might set a target of at least 50,000 shares before closing a position. Volume-based targets can be useful for traders looking to identify trends or changes in market sentiment.
The risk/reward ratio is the ratio between the amount of money you are willing to risk and the amount of money you hope to gain from a trade. This ratio is used to identify how much risk a trader is willing to take in order to achieve their desired returns. By setting a realistic risk/reward ratio, traders can better control their losses and maximize their profits. The most commonly used risk/reward ratios are 1:2, 1:3, and 1:4.
Fibonacci extensions are tools used to determine potential targets in a trend. This tool is based on Fibonacci ratios and can be used to identify potential levels of support and resistance as well as entry and exit points. By setting specific Fibonacci extension targets, traders can better manage their risk while taking advantage of the trend’s potential. To calculate Fibonacci extensions, traders must first identify a significant high and low in the trend. Then they can use the Fibonacci ratios to extrapolate potential targets for support and resistance. Traders should also be aware of Fibonacci clusters when setting these targets as multiple extensions may converge at one point.
Traders can also set multiple targets for a single trade. This allows them to take advantage of any potential price movements and potentially increase their profits. For instance, a trader may set an initial target at the break of a resistance level and then use Fibonacci extensions to identify additional targets along the way.