Last updated on June 18th, 2020
In this latest installment of trading exits for profits, I want to cover another simple way to place profit targets to exit your trades.
We all know that markets travel in waves called impulsive and corrective waves. Impulse moves are with the trend and the corrective move is counter to the trend and is also called a pullback.
Generally, I prefer to enter every trade during the corrective wave in the direction of the overall trend or the impulse waves. It is a bit of an art form as you are entering the trade when the market has yet to confirm a return to an impulse move.
The problem is that when you wait for too much confirmation, the trade is well underway and you now have a larger stop which equals a lower position size.
Impulse Moves For Profit Targets
The good thing is that we can use the prior impulse move to estimate how far the market may travel before entering another corrective wave. We call this a measured move and is useful in determining possible profit targets.
We can actually write that as A2B=C2D which simply means that one waves equals the other. The huge plus on using this type of exit strategy is that you are using actual market conditions to help determine when to exit your trades!
Let’s use the same trade we’ve been using in all of these trading exits posts to keep things fair and compare apples to apples.
Here, you can see I have drawn a trend line from what I determine to be the start of the impulse leg to the end of the swing or the A2B move which occurs before the corrective move.
The line is then projected from the lowest low of the corrective move and projected upwards in the direction of the probable impulse wave.
As you can see, price rally fairly strongly right up into the target which is 180 pips away from my trade entry.
Price exceeded the projection by about 50 pips and then reversed 170 pips to the downside as you can see in the chart below.
Let’s finish off this chart series by measuring the previous impulse leg that took us to the trade target and project that from the 170 pip corrective low.
The measured impulse leg was 272 pips and as you can see, price busted through that target and eventually traveled 70 pip beyond and then reversed.
Let’s not stop here.
Short Trade Profit Projections
How about we measure the reversal leg from the last chart and project from a corrective area that sets up a short trade.
As you can see, the A2B move measures to the pip the end of the C2D move at 162 pips.
I certainly don’t want you to think this is foolproof because they all don’t work out perfectly. In my experience though, they work out enough to be extremely useful for targeting plus other ways outside the scope of this article.
Profit Target Failure
I took the previous ABCD and made it one large impulse move and projected from the larger corrective move.
Price fell short about 40 pips but still served up about 220 pips before price action was giving signs of an issue with the move.
This is just another tool that you can experiment with to ensure you are able to have profit targets for any trade that you enter during the corrective phase. With a sharp eye and experience with price action, you may be able to add some discretion and bank the majority of the move before the retrace begins.
The more you expand your knowledge and how you look at the markets, I feel everyone will have a better chance of trading success because tunnel vision is a double edged sword.