How many times are traders confronted with something like the following scenario? A trade is placed and the market moves in the right direction. Within a short period, the trader is up 20 points in the trade…and then the thought hits: What to do now? Do you ride what appears to be a winner, or do you decide to act more conservatively and take the profit while it’s there?
Opening a trade is only half of a trading strategy. A complete trading system includes an exit plan in addition to an entry plan for every trade. This article is tailored more towards short-term and day traders, but the same concepts can – and should – also be applied by investors with a predominantly growth or value mindset.
Strategy 1: Paying attention to pivot points
Being aware of the daily pivot point levels – the daily pivot point, resistance levels R1, R2, and R3, and support pivot levels S1, S2, and S3 – is important regardless of what specific trading strategy is followed. It is not difficult to see why: such a huge proportion of traders make their buy and sell decisions based, at least in part, on pivot levels. This kind of aggregate decision bias means that these price points often end up being de facto support or resistance levels – even when there really isn’t any concrete reason for this other than group psychology.
Looking at the nearest pivot level for a profit target is a reasonable step to take. So, for example, if you’re buying into a market around the S1 pivot support level, possible profit targets are the daily pivot point (conservative) or the R1 resistance level (more ambitious).
Look at the action shown in the 15-minute chart below. The daily pivot point is marked with blue (P), while resistance and support levels are marked with green (R1) and red (S1) lines, respectively. In the morning, as we can see, the price moves downward but eventually bounces off the support, then quickly breaks through the pivot point, and finally continues upwards to almost reach the resistance level.
Though this (real) chart illustrates the movement of a specific currency pair on a particular day, it’s really not hard to find similar examples – they’re everywhere, in fact. For this reason, pivot levels tend to make good profit targets.
EURCAD 15-minute chart with pivot levels
Strategy 2: Round number “jumps”
For day traders, good profit targets can simply be the next round number price point in the day’s action. This seems simplistic, but research and experience bear out the idea that any number ending in zero makes a natural point around which resistance, support, or increased volatility is likely to occur. Whether this is the result of psychological anchoring or just because it’s easier to type a round number into a stop-loss order remains open to question.
Either way, focusing some of your attention on round numbers is a proven idea. For example, in the forex market, major currency pairs often seem to move in the following “jumps”:
- from the “00” level to the “20 level” (e.g., 1.3500 to 1.3520)
- from the “20” level to the “50” level (or, in each of these cases, travelling in the other direction)
- from the “50” level to the “80” level
- from the “80” level to the next “00” level
For example, if selling short EURUSD at 1.2150, a reasonable profit target might be near the 1.2120 level. If that price level coincides with a pivot level or a major moving average, then the market is even more likely to find some support there. As a variation on this strategy, you can also consider setting a limit order at one or two pips above or below the round number itself.
Strategy 3: Moving average violation
Long-term traders, defined for our purposes as those who look to take a trading position and ride a long-term uptrend or downtrend, have a more difficult time identifying profit targets. For example, if riding a long-term uptrend in GBPUSD, where could a trader look to exit? 1.50 could seem like a realistic goal. Then again, it might go to 1.80.
When trading a long-term trend, rather than having a specific profit target in mind, an alternative exit strategy is to stay in the trade until the market’s price action decisively demonstrates that the trend is changing. In a strong, sustained uptrend, price generally tends to stay above major moving averages such as the 50-day or 100-day moving average. A good exit strategy can be to use a trailing stop adjusted to just below whichever major moving average is appropriate to the uptrend’s timescale.
A violation of that moving average support, meaning price breaking below it, especially on a daily or weekly close basis, may be a signal that the uptrend is ending and the market is turning to the downside. Below, a 4-hour Wall Street chart shows an example of this. The price rises in a steady trend during January but, when it crosses the moving average (the blue line, 50 periods), it is a clear signal that the uptrend is over.
Wall Street 4-hour chart with moving average
Getting a good trade entry is only the start of making a good trade. Good trade management, including having a solid strategy for profitably exiting your position, will go a long way toward making you a consistently profitable trader.
In conclusion
It is tempting, but also intellectually lazy, to aim for “as much profit as possible”. Uptrends inevitably stall or reverse, bulls always become bears, and even the most promising trades turn into pumpkins at midnight.
That’s why it’s so important to define “enough”. At times, this does indeed mean leaving money lying on the table. More often, though, setting intelligent profit targets can provide you with the discipline needed to keep unrealised profits from turning into very real losses. Remember: while a brilliantly profitable trade is certainly something to celebrate, consistent, repeatable success is what gets you ahead in the long run.
