It still amazes me that after all these years of trading and being involved in the financial education business I never find it a challenge to write about the things concerning the markets and the challenges that traders face when attempting to negotiate them. Having just finished up a recent 3-day long Market Timing Class, it was fascinating to explore and talk through the many hurdles the students had before coming to class. Most of them decided that the only way to overcome their issues in the markets was to actually start doing something differently and get the necessary education to get their results moving in the direction they wanted them to be going. In this class, there seemed to be a big issue with understanding the correct profit targets and how to handle the trade once in full swing.
Obviously, for someone who knows very little of how the financial markets actually work, finding a decent entry point into the markets is not an easy task. One of the primary subjects we cover at our school is about teaching students how to effectively time the market’s turning points in advance, thus allowing them to buy and sell for maximum reward and minimum risk, just like the major banks and institutions do themselves. By understanding what a true picture of Demand and Supply looks like on a price chart we can track the delicate footsteps of the big market players and enter our trades when they do. Our students buy when the novices are selling and sell short when the amateur speculators are getting ready to buy again. Learn this skill and you have an edge in any market across any style of trading, not only the worldwide Forex markets but also in Equities, Options and Futures too. After this lesson is learned and the trade is beginning to work in our favor, the next question is how do we manage it most effectively?
It is completely overlooked and, ironically, one of the most vital aspects of the trade; but knowing what to do once the trade is in profit can be a huge difference maker in the final result of the trade and in the long-term will have a massive impact on the trader’s results over time. Let’s face it, we all love being in a wining position, don’t we? It is human nature, I think. Winning and making money feels good and is like the very best rollercoaster ride you could be on; you never really want it to end. However, the complete reverse of that feel-good feeling is when you watch a profitable trade turn back into a losing one. Nothing will suck the life out of you like that. Then, there are the times when you take the easy 3:1 profit and get out, only to come back to the chart and see the market now up 10:1, and wishing you were still on board. You are damned if you do, and damned if you don’t. The solution, my friends, is a simple one. Have your cake and eat it too by having more than one target. Let’s take a deeper look.
A few weeks ago I was teaching a live online session in the Forex XLT room, just around 8am UK time as the London and European markets were waking up and getting into the swing of things. Before the session started, I did my analysis and looked at my key levels where I believed the markets had the very best chance of turning, or where it looked like the big institutions were stepping in to do their own buying and selling. When I have this information together, I put the numbers on the Prep Screen for the students to review before we started the session itself. Here is a shot of the Prep Screen:
At the time, the EURUSD had been enjoying a decent rally for a while and many were feeling a continuation of this move was on the cards. The charts however, were telling a very different story. As you can see, we had a major Supply level between 1.1335 and 1.1390 where the banks had been selling Euros and they clearly had not gotten all of their orders filled at this level, leading me to believe this was a great opportunity to short the EURUSD. Luckily for us the currency pair had already rallied nicely into the area of supply allowing us to place an order to short the pair a little higher at 1.1358 with stops just above 1.1390 with the first target below at demand, offering us at least a 3:1 to the first area of profit. See the shot below as we placed the trade:
You will also notice above, the 3 extra green lines on the chart which I drew in for the students. These represent multiple profit taking areas should the pair continue to fall giving us a total of 4 targets in the trade. Now, the further out targets are way less likely to be hit, but the short position we took, according to our analysis, did have the potential to drop further if weakness crept into the EURUSD. I suggested on the XLT that we could take partial profits on target 1 if it got hit and then develop a more complex profit management strategy if the trade continued to develop. At the time of writing this article, the trade looked like this:
So with target 1 achieved, we now have options. We could take more profits lower down if it continues in our direction; we could close out the trade fully and take a profit now, or even add to the position if it goes more in our favor. There simply is no right answer except the one which works for you. Getting into the habit of placing multiple targets is a powerful tool to have in your trading kit but only if you have a plan that tells you what to do at each target ahead of time and before the trade is even triggered. In 2 weeks, part 2 of this article, we will take a more in-depth look into some of the ways to maximize a multiple target trade.
Until next time trade safe and be well,
Sam Evans – firstname.lastname@example.org