The Dreaded Price Target

One of the most common requests that we receive both in email and on the message board is for us to supply price targets with our trading alerts. This is a reasonable request since most people want an idea what our objective is when entering a trade.

Although price targets may give some piece of mind to a trader when a position is entered, we believe that these target prices actually do more harm than good. Tonight we will explain this philosophy.

Price targets are irrelevant and to back up our stance, we need to look no further than to those brilliant Wall Street Analysts. Analysts price targets are meaningless and if we trade based on these price targets, we are setting ourselves up for not only losing trades but serious time involved and opportunity costs related to waiting for those targets to be reached if ever they are.

Price targets can often result is a false sense of security about a certain stock. They can also cause a pre-mature selling of a position due to the fact that a price target may have been reached. So what if the price target is reached, does it mean the stock can’t go up further? In my early years in the stock market, I would sell stocks after I reached a certain percentage gain on each trade. It was a good conservative plan, but I never made the huge gains because I never let the winners run long enough to get those big gains. I sold too early. In bull markets, it is essential NOT to sell too early. When you are right on a stock in a bull market, your goal should be to be even “righter”. In flat or sideways markets, things will change; you may have to sell at certain price points but not in Bull markets where there is an identifiable uptrend in the overall market. We are not in a bull market right now but there will be one again at some point and we want you to be prepared for it.

Logical Targets in an illogical Market?
Most if not all price targets set by institutional analysts are set based on fundamentals. Rarely are these targets based on technical analysis of the stock chart. If we at STHQ were going to set a price target for a trade, it would be based solely on the chart and the resistance levels and other technical indicators would also come into play. However, we have found that technical price targets are often just as irrelevant as fundamental price targets. While we may often say that a certain stock we are trading or watching may have resistance at a certain price point, we try to not to label that as a price target. Rather, we prefer to think of this area as a level of interest that we should be watching and re-evaluate our trade as the stock approaches that level.

The reason we do this is simple; if resistance was always stubborn and sent stocks reversing in a downward spiral, then stocks could never advance. We know that resistance is penetrateble so we would much rather evaluate our trade as the stock approaches or reaches this resistance level rather than pre-announce that level as the final objective.

Also, as you know by now, the technical picture of a stock changes every day. A strong technical chart can change quickly with one bad new release and large volume selling. Setting price targets ignores this action. The day-to-day fluctuations and changes that occur in the technical picture cannot be ignored.

There are technicians that use what we call “measured moves” to determine price targets. For example, when there is a wedge pattern on a chart, a breakout of the wedge suggests the move will be the same distance from the bottom to the top of where the wedge pattern started. We have used the measured move target to predict where a stock would go before but this doesn’t mean we are setting that level as a price target to get out of the trade. When people use these targets to get out of trades, this suggests orderliness about the market that just doesn't exist. The market is anything but orderly so planning an exit based on what seems to be a logical price target does not make sense in an illogical market.

David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.

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