Monday, February 20, 2012

Why I Usually Don't Like to set Price Targets

One of the prime questions I hear is, “What is your target on this stock.”

I usually have to say I have none.  Because that's the truth.

That is followed up with, “Well, if you don’t have a target, why are you in the trade?”  I consider that an amusing question, it’s so off-kilter from common sense that I usually start laughing when I hear it.
I don’t like to come off as a smart-ass – OK, well maybe sometimes – but the absolutely honest answer to that is, “I am in the trade to make as much money as I can from it.”

Targets are completely unnecessary and counterproductive except in limited situations.  In fact, just thinking of a trade in terms of a target puts me in the wrong mindset from the moment I consider entering it.  An underlying feeling develops that you have failed if you haven’t reached the target, or succeeded just because you did.  In either case, your feeling would be completely unwarranted and could easily cost you money.

I both day and swing trade.  A day trade can turn into a swing under certain circumstances, though I try to avoid that.  Day trades, in fact, can be exploratory trades for later swings.  But that’s another topic for another day.

I day trade because I see a temporary opportunity such as an oversold condition on one of the shorter charts.  I swing when I see a trend on one of the longer charts. Targets don’t really enter into either, though they are more likely on the day trade.

If I’m day trading futures – meaning the trade begins and ends that same day – and I get a good, quick scalp, I’m out.  If I’m wrong on direction and the security starts heading the wrong way, I’m out.  Either way, I’m never in a day trade for a very long time.  That has nothing to do with a “target,” though I suppose you could call it that.  My only target is to make a good profit with as little risk as I can manage.  I take as much as the market will give me, no more and no less.  I prefer to keep things fluid and simple.  In advance, based on overall market strength and my risk tolerance, when long I will often put in a sell order a point higher or something like that just to catch a minor fluctuation, and a stop somewhere lower.  If you want to call those targets, so be it, but that is just scalping.

Swings are designed to last more than one day.  That basically is the only limitation or target I put on it.  Sometimes I don’t even achieve that.  If I enter a swing and the security moves the wrong way immediately, I’m out.  I can always get back in.  Admitting my error quickly saves me time and money.  Making or missing a “target” has nothing to do with it.

For both swings and day trades, I consult both the short and long charts.  A day trade is based on a 1, 3, 5, 10 or 15 minute chart, but I consult the longer 30-minute, hour and day charts to make sure I’m trading with the larger trend.  It’s just safer that way.  Swings, on the other hand, are based on the hourly and daily charts, but I prep with the shorter charts to find a good entry spot.

Once I’m in either trade, my only goal is to make as much money as I can from it in a reasonable time.  If I enter a day trade and get an immediate fifty cents, I’ll take it and move on and be quite pleased with it and maybe even boast about it on twitter like everyone else.  I’m not going to to stand and fight because my original target was seventy five cents.  That’s just money management.  So, if I do that, what is the point of having a target?  It will just distract me.  These are fluid situations, and I throw out any preconceived notions that might lock me in to poor choices.

“I better not sell here despite the sell-off due to that Guardian article, because I’m only at $49.30 and my target is $49.63.”  I don’t think so.  My goal is to make a reasonable profit and get out without damage.  That’s my target.

Similarly, in swings, I keep going until the market signals the risk/reward ratio is turning against me.  If all lights are green and I’m riding a trend, I’m not going to sell at $50 just because I set that as my target a week before when $52 is looking quite attainable.  If the trend changes on me or what looks like a typical three-day sell-off starts, I’m not going to try and ride it out because I set a target at the outset of a $5 gain and I only got $4.  That seems silly to me.

Usually, the most I’ll do is look at the chart and see a likely ending zone.  That can be based on prior price action or any of a number of other factors.  Maybe I just want to make sure I get out before the weekend, or some earnings news.  Lots of decisions can shorten a trade.  Having a “target” isn’t one of them.

The reality is that, with a swing, you never know how the market is going to react from day to day.  Your security may go up fast and top out, or may do a gradual incline.  It is tough to know that in advance.  Breakouts are particularly difficult to judge in advance, due to their ferocity.  Often, a breakout will Bull Flag, in which case the target sets itself.   Prudent choices of stop loss points are more valuable than targets.

Targets usually are gimmicks used by sell-side brokers and analysts to make themselves sound like they know what they’re talking about and convince you to buy or sell.  When an experienced trader talks about targets, I have a pretty good idea where they’re coming from,  and I know that’s not my bag. I don’t need that crutch from a broker.  Hey, if it works for you to organize your thoughts, terrific.

There’s an old military saying.  “No plan survives contact with the enemy.”  Same way with this target idea.  The market here is the enemy, and no target is going to survive what the market does or does not give me.  I simply don’t like setting targets in Dollar and Cents terms.  Selling at such a “target” would be a pure coincidence of many factors.

Targets usually don’t interest me.

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