I recently received this question via email and also have heard it repeatedly asked by students in my classes. I thought it would be fitting to answer the question in this forum.
“I have a question with regard to targets. What do you think of having no targets at all? I am considering not to put any target and continue to trail using a technical stop as long as I can on the ITF. Reason behind considering such a thing is because I do not understand targets at all. Please advise.”
Well K, in our courses at Online Trading Academy, we teach that prior to entering any trade you should know three things: Your entry price, the stop loss price, and the target price. Basically, we call it S.E.T.ting your trade, (Stop, Entry, Target). It is crucial that you set your trade for several reasons.
When most traders enter the markets, their decisions are often driven by fear and greed. Trading or investing with these emotions is what costs most people their chance at success. Let’s examine these emotions and how they deter from our achieving our trading goals. Then we can look at how S.E.T.ting your trade can help combat this emotional deterrent.
People have fear because of the unknown. When we do not know the outcome of something, our minds race with all of the possibilities and much of that is often negative. As a trader or investor, when you put money into the markets, most will hope for a win but they will often allow fear to dominate as they fear losing and not knowing how much they may lose.
But an educated, Rule-Based trader who identifies their entry and stop loss price BEFORE entering the trade has nothing to fear. That trader already knows the worst case scenario for the trade. If their stop loss is hit, then they will lose X amount. If they proceed to enter the trade, they do so knowing the worst that can happen to them and have accepted it as a possibility.
Of course possible is not the same as probable. We enter trades when there is a high probability of the trade working in our favor. So while there is a possibility of loss occurring, the chances of it happening are low.
So why do we need a target then? Why not just enter the trade and let it run until we are stopped out by a trailing stop? Fear and greed once again are the reason. We identify a target at the highest probable zone where price is likely to stop moving in our favor and reverse or pause the trend.
Fear that pervades our trading will often cause us to panic and exit from a successful trade when there is a small move in price against us. If we have not recognized where the trend is likely to end, we do not know if the small movement is the trend reversing (we would need to exit the trade), or simply a correction, (we can hold on or even add to our winners here).
Greed is also something that will hurt your trading. Without a target set on every trade, there is a high probability that you will try to get too greedy and hold on to a trade longer than you should. If you have ever been in a successful trade you may have experienced this.
Imagine you are in a trade where you are profitable Rs. 30 per share. You are still holding while the price corrects down to Rs. 27 a share. Most people are thinking, “I just lose Rs. 3 per share.” They will be tempted to hold on until that gain comes back. Unfortunately it often gets worse. You have to realize in that scenario that you haven’t lost anything. That is greed. You had what we call paper profits. They mean nothing and your still have a Rs. 27 gain!
If you identified your target prior to entering the trade, you would know whether the Rs. 30 per share gain was one you should book by exiting the trade or if you are right to hold on knowing prices are probably heading higher.
The best way for a trader to minimize the effect of emotions on their trading is to trade using a Rule-Based strategy like the one we teach at Online Trading Academy. Come learn the rules for successful trading and join the thousands of graduates who are on the road to being thriving traders.