If you are a forex trader and you know how to analyze the market and take trading entries you have higher chances to make huge losses. Trade management is a vital part of forex trading. You should know the exact way to place profit targets in forex trading. Otherwise, you will not be able to make a sustained growth. In the following section, we will see the theory of profit targets and how you can set profit targets in forex trading.
05 March, 2020 | AtoZ Markets –The most feasible approach to place profit targets in Forex is the most emotional and technical aspect of it. You should exit a trade when you have a respectable profit, rather than waiting for the market to come back against you. The difficulty is that you will not want to exit a trade when it is in profit and moving towards your favor. It will feel like the trade may continue in your desired direction.
The bitter truth is that not exiting the trade when it is in your favor usually means that you will make an emotional exit. Therefore, the trade might come back against your current position. Your focus when placing profit targets in forex should be to take respectable profits or a minimum 1:2 risk/reward ratio. If you have predefined prior to entering, you will try to let the trade run further.
So when your trade is running with profit what you should do? Do you need to hold or wait? Let’s start with the theory behind the profit targets in forex trading.
Profit Target Placement Theory
After identifying the logical placement for stop-losses, your focus should be finding a logical profit target placement with an appropriate position size. It is important to have a decent risk: reward ratio on every trade. Otherwise, it is not worth taking. Therefore, you should identify the logical prices for your stop-loss, and then proceed to define the logical place for your take-profit.
If after doing this, the decent risk/reward ratio is probably worth taking.
Nonetheless, you have to be honest with yourself in such a situation. You should not ignore key market levels or other obstacles that are keeping you away from reaching a satisfactory risk/reward ratio. Moreover, you should not forget to use the correct stop-loss and take-profit ratio. You have to understand the market context and structure, support and resistance levels, key levels, candlestick highs and lows, and other important elements.
As a summary of the theory, you should define some key levels to make a logical take-profit point. Moreover, you should follow the key level that may obstruct your path from making an adequate profit.
How to Set Profit Targets in Forex Trading
Placing the profit target is important as placing your stop loss at the right level. While your stop-loss protects your capital, your profit targets ensure that you make a profit and grow your bottom line.
Placing your profit targets too far indicates a risk that the price may rebound to hit your stop-loss. On the other hand, placing them too tight might force you to miss a large portion of potential profits. So what is the exact point to place profit targets?
#1 Support and Resistance Levels
Most of the traders use support and resistance levels as a potential stop-loss level. However, traders can use support and resistance to place profit targets. You should try to identify important support and resistance levels on your chart. Therefore, place your profit targets accordingly.
Make sure to use a buffer in every trade. In a short position, set your take profit a few pips above a support level. Therefore, in a long position, set the target a few pips below a resistance level.
Make sure to be realistic with your profit targets. Besides, support and resistance levels, you can use the Average True Range indicator that can help you to measure the degree of price volatility in a currency pair. If you’re trading on the 4-hour chart, it is not logical to place a profit target at twice the pair’s average weekly volatility.
#2 Fibonacci Extension Levels
Fibonacci expansions and Fibonacci projections are levels based on the Fibonacci sequence of numbers beyond the 100% retracement level. Most of the trading platforms, including MT4 and MT5, allow drawing Fibonacci extension levels with retracement levels.
Important Fibonacci extension levels act as hidden support and resistance level in the chart. The potential profit targets are the 123.6%, 127%, 138.2%, 161.8%, and the 261.8% levels. Besides profit targets, you can use these levels as a trend-following trade.
You can see profit targets based on Fibonacci extensions in the following chart. Look how price retraced at the 38.2% Fibonacci retracement level and moved higher to break above the 127% extension level. The 38.2% retracement level combined with strong horizontal support levels.
#3 Place Profit Targets Based on Chart patterns
Classical chart patterns often project a profit target when they are broken.
The Head and Shoulders pattern projects a possible profit target that is equal to the height of the pattern. The height is usually measured from the neckline to the top of the head that is often projected from the breakout point.
Here’s an example.
Points 1, 2 and 3 show the left shoulder, head, and right shoulder, respectively. The upper vertical line indicates the height of the pattern. You should use the exact amount of movement as a target once the price breaks out from the neckline.
Other chart patterns including Wedge, rectangle, and triangle have a potential profit target indication. You can project a profit target that is equal to the height of those patterns.
#4 Maximize Profits Using Partial Closing
Partial profits work marvelously to maximize your profit targets. Profit Targets are set using the resistance level. At some points on a chart, the horizontal resistance level might confluence with the channel resistance. Therefore, you can close part of your profits from these levels as the market may rebound from there.
Partial profit is a great technique to capture maximum profits during long trends while making profits and minimizing the risk at the same time. In the case of market uncertainty and volatility, you can close your positions with a minimum profit rather than messing up all the things.
#5 Trailing Stop-Loss
Another effective way of making profits is the “trailing stop”. This strategy is used during strong market trends if you are a trend trader. The trailing stop trails the price with the exact Stop-Loss size.
So, for example, if you set the trailing stop- loss at 50 pips, the trade will close with 50 pips profits/ Therefore, as the trade moves with more profits so does the Stop-Loss with the same amount.
For example, if a trade moves 200 pips towards your desired direction, you can trail the stop- loss at 50 pips. Therefore, you can lock the price with a nice 150 pips profit. In any case, if the price moves 50 pips against you, the trade will be closed automatically.
The disadvantage of this strategy is that it is lagging and often provides a sufficient amount of profits. Therefore, some traders don’t like this method, and they prefer to use indicators like Fibonacci projections or pivot points.
Still, it is possible to use the trailing stop as protection until the final target is hit.
Besides your forex trading strategy, your stop loss and take profit plays as a critical function in your trading performance. Identifying a high-possibility trade and getting into the trade is only half of the work.
Knowing where to place your profit targets in forex trading, how much earnings is enough, when to close losing positions, and how to avoid market volatility interfere differentiate the very successful trader from an average one.
One of the main blessings of technical analysis over fundamental analysis is that it provides actual and tradeable prices that may be used to take a trade and place stop-loss with a minimum risk
This so-called “chart stops” has proven to be the simplest form of stop losses, as it has a tendency to respect support and resistance levels again and again. Besides, placing profit targets in forex trading, having strong trading psychology is key. You can make losses even if you can set stop loss and take profit levels perfectly. Therefore, make sure to keep your brain free from any bias before entering a trade.
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