The “Point of Profit” Reference

We set price targets because they are one of the three essential variables of a setup; target (reward), point of ruin (risk) and probability. We do the math to make sure that the price level we choose as target is attainable with a probability that’s high enough. We also check whether the entry levels provide enough of a ride to the target to offset the risk we are about to take. Price targets aren’t prophecy.

Obvious, eh? Yet there is a core misunderstanding about the concept of price targets.

By reading forum comments, I have realized that many traders attempt to short once prices reach the bull (buy) price targets and buy when prices reach the bear (sell) targets, as if the targets themselves ought to guarantee a reversal and change of trend. But, allow me to clarify. There is no way to tell how far the market will rally or the decline will fall before the trends reverse. Setting a price target is just an educated guess, based mostly on proportionality and the strength of the trend, and it serves calculation purposes only. Is there enough room, with good enough probability, to initiate a trade or not? If we have taken the trade, what is our “point of profit” reference when navigating the winning trade.

Updated hourly S&P500 chart with the November 16 expectations and the road travelled since thenMy 2,060-2,070 SPX projection from the November 16 “Nasty Grind” post is exactly like that; a good enough “point of profit” reference for long positions. Yes, sometimes you will see the market hit my price target to the tick and reverse (like here in the EURUSD). That feels like magic, but frankly that happens maybe 5-10% of the time, so that is not the skill to focus on. The point is to use the bear targets for closing a short scalp position, and the targets above the market to close long scalp positions – not the other way around. You may stick with a trend following position, like the one in the S&P500 suggestion, but making sure that your stop loss level is trailed to at least breakeven, or even higher, to lock in some profit on a trade which has reached your reference point.

Again, that target, or reference point, provided the solid mathematical foundation in the risk-reward-probability relationship when you opened the trade; it doesn’t mean the market has to reverse once it reaches that level.

Although I feel the exhaustive nature of the current rally, expect the market to reverse and for it to at least test the October 2014 lows very soon, the SPX 2,060-2,070 bull target has nothing to do with my potential short trade to the 1,910 area during the next round of selling. Before initiating any short positions, we need to see confirming price action and look for a totally different checklist of attributes when defining that trade. Check out the “How to Correctly Identify a Change in Trend” article and you will understand that the market does not meet much of the requirements for a swing short trade as we speak now. At a minimum, we need to see heavy selling below 2,030, and then, preferably, a lower high test or double top test of the 2,065-2,070 zone.

Once we see some intriguing set ups we’ll be back here writing an update.

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About Laszlo Nagyferenczi

Laszlo Nagyferenczi is a day trader, analyst and instructor as well as the creator of the proprietary Context-Momentum-Signal concept. He has authored over 200 blog articles about his unique approach to trading and the Elliott Wave Theory. His clients appreciate his ability to go from the theoretical to the practical i.e. all the way to the actual trade set ups. Originally hailing from Hungary, Laszlo is fluent in English and Hungarian with a long list of education credentials including BA in Economics, Certified Elliott Wave Analyst (CEWA), Certified Adult Educator for T-Groups, Professional Co-Active Coach (PCC) at CTI. The real education, though, has been the trial by fire in the markets, with real capital at risk.

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