Learn to Plan Your Next Trade: What’s Your Target?

Successful traders are fast, thorough planners. As soon as a stock on any given watch list triggers, a trader must spring into action, deciding on an optimal entry point and how much of the stock to buy.

However, the best traders are answering another important question about every one of their trades before they pull the trigger.

It’s a relatively easy process that a lot of traders simply ignore. But if you ask this question — and answer it properly using the following steps — you will have the chance to squeeze additional gains out of every trade you make…

Here is the all-important question: What is your target exit price?

If you have ever jumped blindly into a trade without considering where you will sell, you probably lost money or left valuable gains on the table. Believe it or not, many traders ignore this step entirely. In my mind, this is a terrible mistake that leads to poorly executed sells.

As you’ve probably already figured out, a poorly planned sell will cost you money.

Instead, what you need to do to stay ahead of the pack is take the planning process you use for buying a particular stock and use it to carefully plan when you will sell your shares.

As with any trading question, this one must be answered in multiple steps. First, you have to decide on your trade horizon. How long do you plan on holding the stock? Is it a day trade or a swing trade, or even a stock that you will plan on holding for months?

Your charts will help answer these first few questions. And even if you only plan on holding a stock for just a few hours, you should look at a daily and weekly chart. This will help you identify important areas of support and resistance that will tell you where you can expect your stock’s trend to run its course.

For example, if you plan to trade a stock that has just broken resistance, where are the next levels of resistance that could stop the stock’s progress?

Once you identify these areas on your charts, you’ll get an idea where the breakout might slow down, or reverse entirely. If you’re planning a short-term trade, a prudent target can be the next level of resistance above the initial breakout.

Of course, your target exit price isn’t just set for when a stock follows through — it works for cutting losses as well.

You should set two targets:

• Set a hard or trailing target for taking gains.

• Select a strict stop loss for cutting the trade loss.

The stop loss can be a moving average, or a recent area of consolidation and/or support.

Performing this quick research will give you a better idea as to how a given trade will potentially perform to the upside and the downside. You’ll be able to set more accurate and efficient stops and targets, helping you optimize every single trade you make.

Sincerely,
Greg Guenthner
Penny Sleuth

December 22, 2010

Learn to Plan Your Next Trade: What’s Your Target? was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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