Do You Find Yourself Target Challenged?

By:  Oliver L. Velez

The following is an excerpt from Oliver Velez’s Strategies for Profiting on Every Trade

One of the greatest challenges in trading comes from getting to targets.  It is one of the most difficult areas both from a technical perspective (finding the right areas on the chart) to a psychological perspective (staying with the trade while the stock achieves that target).

Psychologically, this is perhaps the most difficult area because you may not even know you have the problem.  If you don't take stops, you see and feel the pain immediately.  You may fix it, or may not, but you know what you have to deal with and you cannot avoid it.  If you do a poor job reaching targets, you may not notice the problem.  You may even feel you are doing well because you feel like you have a lot of winners.  The only problem is that you have a handful of losers that wipe out all the small gains.  Without tracking and evaluating the statistics on your trades, you may never realize the importance of this issue.  This is where most people stand.  Let's take a look at which issues to consider when setting targets. 

Unless you are breaking to new highs, you will always encounter some levels of resistance.  The question is, at which point will the supply overcome the demand?  You need to examine the quality of the trend and the quality of the current breakout.  Next, you have to look at the quality of the resistance you are encountering.

First, consider the quality of the trend – or the price pattern being played.  Different price patterns leading into the play will have different power to drive the stock.  Strong uptrends and downtrends are always nice here because they will go through the first areas of supply and demand.  After all, an uptrend is a series of higher highs and higher lows.  Long bases and wide range bars also help provide the momentum to continue prices through congested areas.

Second, the type of breakout that happens can help fuel the stock in the short term to overcome areas of supply and demand.  Here, stocks that create shocking or surprising moves can fuel a stock through supply or demand areas.  Examples are stocks that gap out of long bases or professional gaps that go against the trend.

Third, different levels of resistance have different meanings.  Single pivots formed against a strong trend are easiest to break.  Long bases and failed breakouts will have the highest level of supply or demand.  This is especially true when they are on the right side of the prevailing trend. 

To use an analogy, imagine a car or truck driving down the road and crashing into a wall.  The pattern is analogous to whether you are in a small car or a huge truck.  The breakout is analogous to the speed at which you are traveling, and the target is the type of wall you are about to hit.

A mortgage gap that also gaps over a base and resumes an uptrend, that runs into a single prior pivot, is like the Mac truck going 100 miles per hour running into a wall of empty boxes.  A buy setup in a downtrend with a base above it is like an economy car coasting uphill running into a brick wall.

For an intraday chart of Apple Computer see figure 3-10.  It is an example of a pattern, entry and a prior high that dictates going for more than the prior high.

Here we have a nice uptrend, a gap up, and prior high that left little supply behind.  AAPL stalls at the prior high before going much higher.  Selling some into the prior high and holding some for higher prices (next target is not visible on the 5-minute chart) is the key.