Your Target Price Is Only A Planning Tool
By Ultimate Trading
The target Price Helps You Figure Out Your Risk-To-Reward Ratio
When you first form your plan for a trade, you should consider approximately
what price or price range you think the stock is likely to reach. You
can call this a target price, but this label gives some traders the wrong
impression of its purpose.
A target price is not a price that the stock has to meet. A stock does
not have to do anything, and certainly not just because you think it will
or you want it to. If you treat your target price as a goal, it can lead
to all sorts of trouble and false expectations.
Instead, your target price should be used simply as a planning tool. The
target price helps you figure out your risk-to-reward ratio. It also gives
you an exit point, or at least a point where you'll reassess whether you
believe the trade can continue to move upward. Your trade may never reach
your target price, though. Other things can interfere with its progress.
And there's always the possibility that you set your target price higher
than you should have.
Since there's no way all your plays will hit your target price, it can
be a good idea to make a habit of selling half your position at a more
conservative target price. Routinely taking profits along the way will
reward you in the long run.
There are a number of things that can interfere with the progress of a
stock's movement and force you to close your position sooner than you'd
anticipated. What to do if any of these possibilities become realities
should all be part of your plan. Along these lines, here are reasons you
should always close a position, whether or not it has made it to the target
price you thought it would:
Exiting a losing trade is not a big deal. Quite the contrary - it's good
trading. The best traders would rather lose a small profit than take an
unnecessary risk. You don't have to win on every trade; no one does, and
it's dangerous to try - it can lead to huge mistakes. In fact, by limiting
losses, a good trader can be profitable overall by making money on only
40 percent of his trades.
- The end of a trend: You realize the trend isn't working anymore.
- Broken momentum: The stock's upward movement has slowed or been abruptly
- An approaching major psychological barrier: The stock is about to reach
$100 or $200 a share (you probably should have anticipated this as part
of your plan.).
- An approaching technical barrier: The stock is about to reach a resistance
level it's been unable to break through before (again, you should have
anticipated this as part of your plan.)
- Unsafe market conditions: A sudden marketwide decline, the threat of
one, or serious uncertainty.
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copyright 2005 Target Price