Setting Objectives and Other Position Exit Criteria

It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! It is no trick at all to be right on the market.

—Edwin Lefèvre

A trade is like the army—getting in is a lot easier than getting out. Provided the trader is adhering to money management principles, a losing trade presents little ambiguity; that is, liquidation would be indicated by a predetermined stop point. However, the profitable trade presents a problem (albeit a desirable one). How should the trader decide when to take profits? Myriad solutions have been proposed to this dilemma. The following sections explore some of the primary approaches.

Chart-Based Objectives

Many chart patterns are believed to provide clues regarding the magnitude of the potential price move. For example, conventional chart wisdom suggests that once prices penetrate the neckline of a head-and-shoulders formation, the ensuing price move will at least equal the distance from the top (or bottom) of the head to the neckline. As another example, many point-and-figure chartists claim that the number of columns that compose a trading range provides an indication of the potential number of boxes in a subsequent trend. (See discussion in Chapter 4 for an explanation of point-and-figure charting.) Generally speaking, chart patterns are probably considerably less reliable as indicators of price objectives than as trade signals.

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