The trick behind setting a target price is to exit the market with good profits rather than letting the market move against you and exiting out of fear. Taking a correct decision of placing a target price to exit the markets is a difficult one as the trader thinks that the market will keep on moving in his favour and out of greed he resists from exiting. Although because of human nature if you keep on doing this, the result will always be a loss as you will sell in the opposite trend out of fear. So, you need to remember the ratio of 1:2 which means the reward should be two times or greater the risk.
Placement of the Target Price
The next step after determining the stop loss should be identifying the target price keeping in mind the ratio of risk reward. Just ignore the trade that is not showing a decent risk reward ratio as it is not worth trading. The place for target price should also be logical like in the case of stop loss. However, it is very important that you do not miss any parameter such as market level, stop loss, etc before determining the target profit. So the traders open a position without analysing the key market levels which is not a correct way.
Before determining the target profit, you need to analyse some of the things. I usually check the support and resistance levels, highs and lows, etc to determine a logical trade and ignore the trade if all the parameters are not fulfilled.
Let’s take an example to understand the placing of profit target. In the following chart, the trend took a big reverse and starting moving upwards making a pin bar. So we place the stop loss just below the low of the pin bar. The entry point is indicated in the chart and from that entry point to the stop loss point, there is a risk factor. Now you have got a window of risk; it is the time to extend these windows upwards to identify the profit targets as done in the chart.
Now, let us put everything together that we have learned till now in the three parts of the article. In the following chart we can see a pin bar after a resistance level which is an indication that the market is going to go downwards. So, the best point to place a stop loss is just above the high of this pin bar.
The next thing in the chart is the key support level which is below the entry point, but at least 1.5 times the window of my risk. Also, there is no key support level after that which means the trade is worth taking.
Now, it is entirely possible that the market may reverse after the key support level. So, to be on safer side, the traders usually place their profit target at R1 to book the profits if the market reaches that level. This will avoid any panic caused by the reversal in the markets.
You can see in the chart that the market broke the key level and moved to the level R3. This is a perfect trade, but all trades are not like this. If the key support level builds above the R1 i.e. in the risk area, then the trade is not worth while.
The above example shows how important it is to place a stop loss and target profit logically.