Forex traders often use target trading as a strategy to trade. Preemptively establishing profit-taking points, or targets, at which to exit your positions or partially exit them can be achieved by identifying market trends and anticipating price movement.
Trading grid strategies involve creating conditional stop-entry orders and setting a profit target for each pending order in advance.
Why trade with targets?
Establishing profit targets allows you to assess risks and rewards before entering a trade. Setting goals helps you determine a realistic profit-taking value before entering into a position and, therefore, know the risk-to-reward ratio.
Profit targets should be realistic and represent a point of equilibrium between risk and reward. While profit targets limit potential gains, they also limit potential losses by exiting your trade when you reach the target, regardless of what happens afterward.
A profit target reduces the risks associated with high-risk trades by locking in profits incrementally. In cases where the price moves in the opposite direction of the profit target, traders bookend trades with profit targets and stop-loss orders to limit losses. The use of conditional orders is also popular among traders. In other words, if a certain number of points reaches, a conditional order is triggered, entering them into a given position.
What indicators can you use in target trading?
Trading target levels allow you to focus on specific price levels within your trading strategy. These indicators are not exhaustive, but you may wish to consider them:
- Fibonacci levels: By planning trades around these levels, you can easily plan extensions and retracements. Traders can place their targets above or below a stop-loss price.
- Relative strength index: RSI-based recommendations might only sometimes match your target price. However, you can use RSI to determine whether a stock will reach that price or whether it’s wise to exit its position early before it changes direction.
- Moving average convergence-divergence (MACD): Looking for crossovers between MACD and price momentum can reveal target prices. In the case of a MACD cross over the signal line, this can indicate a potential price swing and even motivate the opening of a position.
When the MACD crosses below, it indicates an impending price reversal, which could result in you falling short of your target or, if you have already reached that point, allowing you to exit early.
What types of stop-losses should you use in target trading?
A stop-loss can minimize risk and preserve the value of your account balance, regardless of whether you reach your target price or sell short of it. Plan out your target trading by considering these three types of stop-losses:
- Trailing stop-loss: The trader adds a stop-loss to a currency pair as price movements move in their favor to lock in profits. You protect yourself from sudden economic downturns by securing a profitable asset price.
- Total stop-loss: Using incremental stop-loss orders, you can gradually reduce your position size as profits accrue to reduce risk and capitalize on future growth. To ensure that the price continues to climb beyond your target, you can sell off some of your position once you reach the target price.
- Stop-and-reverse order: This allows you to exit positions at set prices in case prices swing suddenly, preventing you from suffering a dramatic loss of value. You may, however, reenter the position later as the currency pair’s value recovers by setting a subsequent purchase order at a specific price level.
Bottom line
It would help if you had targets to guide your trading strategy and give you something to aim for rather than getting swept away by the allure of trading profits and price increases. It can help you stay grounded, but it can also lead to open positions outside your best interest. It is only sometimes possible to achieve every price target-and. Knowledge about when to cut your losses can result in being burned and losing modest profit opportunities.
