Last updated on August 21st, 2017
The issue that many traders have is getting out of the trade especially the day trading profit targets you are going to use.
If you swing trade, you will only make the decision to exit your trade every few days or so. As a day trader, you will be making profit taking decisions quite a few times during one trading session.
There are three exits for a trade:
- Exiting trades for a profit
- Exiting trades to cut your losses
- Exiting your trade at break even (although you will still pay spread/commission)
“I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have” – Paul Tudor Jones.
You could keep it all simple and decide that:
- You are risking X amount of pips per trade
- You will exit your trade at a multiple of the X for a profit
- You will exit your trade once the amount of pips risked is taken
Whether or not that works is another matter. Like anything in trading, test your theories before risking real money. With that method, you are using risk to reward ratio to decide on your profit target. This does not take into account one of the most important parts of a trading chart.
Use Market Structure For Your Day Trading Profit Targets
Price makes structure and the noticeable ones are those that show where order flow has entered the market. We must assume that when price reaches those levels again, something is going to happen.
A trending market has a rhythm to it.
A price flow.
We know that markets make higher highs and lows when moving up and the opposite when heading south. A higher high can only be made when price is pulling back and depending on your trading method, this presents both long and short opportunities.
Looking at the following chart, we can see that price is in an overall uptrend.
- Price makes a higher high and starts to pull back
- Price puts in a higher low and starts to rally
- Price puts in a lower high and starts to drop
Many people see the rhythm broken and start to think shorting the market is the right play. Price slams through the low and those that didn’t short when the move at #2 stalled pile in on the break.
Catching Trend Changes
For you though, you know that trying to catch the trend turns (selling the high in this case) is difficult and you also know that two leg corrections (complex corrections) are pretty common. You are looking to buy into the uptrend that is not truly broken.
This chart shows the buy at an area where price was supported.
What makes sense at this point?
Let’s look at what has probably occurred.
All those that went short have their stops in either of the two red boxes. What we are not sure of is the strength of those levels. What is the conviction of those sellers? We won’t know their conviction until price comes back to those areas where a few events could take place:
- Price can rally right through those levels
- Price can be rejected short
- Price can find balance near the top of the swing
We don’t know what will happen but we know this: If price rallies through the levels, those that sold near the highs will have to cover by buying which will drive your long position up pretty quickly.
It will also confirm that the uptrend is still intact.
- If price is rejected short, there is a good chance our stops will be hit.
- If price finds balance and consolidates, our patience will certainly be tested.
- Those that lock in some profit may find their stops hit on failed breaks short.
Conclusion? Use those areas as profit taking levels.
By having a take profit in those areas we are using the structure of the market, the rhythm of the market, and accepting a few scenarios can play out in those areas to objectively put some money into our trading accounts.
- Do you leave a runner?
- Is this the best way to take a profit?
This next chart will show you how price reacted to those highs.
The shorts were ripped out of their positions and longs were driven upwards 226 from entry while full position exits banked 82 pips.
Was it a good play?
Before you say yes or no, look at this scenario.
You may say you would not have bought the lows but it’s obvious some did. They may have seen a big rally up and then taken the first pullback in fear of missing “the big move”. Other may have skipped the first retrace but after seen the big green candle, were waiting for the next pullback to buy.
Using Objective Levels For Price Targets
As you can see, there is nothing guaranteed or perfect in trading. Understanding Context, Structure, and the Psychology (CSP) of the masses can be a huge plus in enabling you to add money to your account on a consistent basis.
Using these types of levels for profit taking can be a consistent way to add to your account because it takes into account the CSP.
Market structure for day trading or swing trading is always a good place to look at for profit targets. Once price reaches those areas, watch the price action to see if you can determine who is winning the battle at those levels.
You want to make sure that whatever you are using for profit targets as a day trader, swing trader, futures trader….is that the profit targets form a part of your trading strategy and are in your trade plan.
Higher Time Frame Exit Strategy
One method you may want to use as a day trader is to look at higher time frames for the price level you will exit at. Day trading especially on lower time frames has a lot of levels you may look at as possible exit points.
I’m a minimalist by nature and prefer as little decision making as possible. If I can remove levels that appear on short term trading time frames by going up a factor of 3-5, I will do so.
While I have no stats to back this up, I believe higher time frame levels carry more weight because they are easily seen as opposed to a 5 minute level.
Fibonacci Levels For Profit Taking
I want to leave this with one method that many traders I know use. Fibonacci profit targets use the Fib retracements and extensions to measure the move you will use to exit your trades.
This is applicable for day trading profit targets as well as longer term trading. Give it a try by reading this article: http://www.netpicks.com/fibonacci-profits/