When And Where To Take Profits

THE FIVE CONCEPTS
There are a few ways to take profits, and each have their advantages and disadvantages. These techniques are also different from the ones based on the price patterns and entries taken. Although there exists a variety of targets, many traders cannot or do not know how to make accurate price projections. For example, when applying oscillators most traders would follow the oscillator till it reaches an overbought area and then decide to sell. Conversely, they would buy when an oscillator reaches an oversold level. But by using oscillators they cannot determine specific price ranges to exit when looking at the price charts. Here are a few concepts to consider when developing exit strategies:

1 Support/resistance
2 Price pattern target measurement
3 Fibonacci extensions
4 Trendline channels
5 Floor trader pivots

1. SUPPORT/RESISTANCE. The first concept uses the nearest support/resistance areas as targets for taking profits. This is probably the most common of all the profit targets discussed since they are the easiest to identify in price charts. Support and resistance areas are usually the short-, medium-, and long-term lows and highs. On an intraday chart the opening and closing prices as well as the gap top and bottoms are considered support and resistance areas. Figure 1 is an example of the support and resistance used to identify entry points as well as exit points.

FIGURE 1: SUPPORT/RESISTANCE. These levels can be used to help identify entry and exit points.

FIGURE 2: PRICE/PATTERN TARGET MEASUREMENT. Here the price target is measured after a double-bottom formation.

The most common extension levels are 138%, 150%, 161.8%, and 200%. Although these are somewhat arbitrary in determining which level will be the one for prices to stall or reverse, many traders tend to use an area where there is a confluence or cluster that are within a narrow level. On the daily chart of Research In Motion (RIMM) in Figure 3 you can see how Fibonacci retracements may be applied.

FIGURE 3: FIBONACCI EXTENSIONS. Here, Fibonacci retracements are applied to determine where prices will hesitate or change direction.

FIGURE 4: PARALLEL TRENDLINE CHANNELS. These trendlines can be used as support/resistance levels.

5. FLOOR TRADER PIVOTS. These include the pivot (or the average), resistance 1 (R1), resistance 2 (R2), resistance 3 (R3), support 1 (S1), support 2 (S2), and support 3 (S3). The calculation of these pivot points is easily available. Daytraders often use these pivot points to properly time their profit-taking.

In addition to the daily pivot points, weekly and monthly pivots can be used for trading higher time frames by swing and position traders. Floor traders use these numbers daily and electronic traders are now using them to apply to different markets and time frames. These pivots are one of the most useful tools for intraday trading. In fact, many experienced traders swear by them. On the five-minute chart of RIMM in Figure 5 you see an example of applying pivot points.

FIGURE 5: PIVOT POINTS. Often used by daytraders, pivot points can be used to time entries and exits.

These targets are a simplified guide to give ideas on how to set profit targets. Study and test them to discover which method works best with the existing strategies you already use for your trading.