I’ve gotten a few emails asking me to cover the basics of technical analysis over the past few weeks.
This isn’t an unusual request… I tend to get at least a dozen emails each week asking me to teach more simple analysis techniques.
The Basics of Technical Analysis: Don’t Focus on Entry Signals at the Expense of Everything Else
This particular request grabbed my attention because it also asked for clarification on profit targets and managing winning positions.
It’s not a common request but it is a great one…
As I’ve mentioned before, most people learning the basics of technical analysis tend to focus on entry techniques.
But if you think about it, exits are just as important in managing risk and deciding when to take profits.
In fact, most successful traders focus on exit techniques at least three times as much as entry strategies!
The Basics of Technical Analysis: The Moving Target Exit Strategy
There are of course many different exit strategies traders can choose from…
Just like entry strategies, they’re based on either price action or technical indicators.
One of my favorite methods is called the moving target exit strategy.
It’s a simple method to learn and you can apply it to any stock, ETF, futures and even the currency market.
But the moving target exit strategy can also be applied to both the long and short side…
To trade the short side, you’d just reverse the instructions I’m about to give you.
The Moving Target Exit Strategy: The 10-Day Breakout Is a Great Way to Stay in a Trend
The moving target exit strategy was created many years ago and is often used by large hedge funds and pro traders.
I’ll demonstrate this method step by step so you can get a good feel for how it works in the real world.
The first step after you enter the market is to place your stop loss two ticks below the low of the entry bar.
The second step is to let the market work for five trading days. Don’t move your stop-loss level or set any profit targets for the initial week of the trade.
To apply this method to day trading, switch each trading day for each trading bar.
After you’ve entered the position and it’s had five trading days to work, start counting back 10-day lows each trading day. When the market makes a 10-day low, we’ll exit the trade.
Watch how the moving target exit strategy keeps you in a trending market…
If the stock didn’t come down so much, the method would have kept me in the trade a bit longer.
This happens often with stocks that are trending strong and retrace only for a few days at a time. I once thought about a short-term trade that kept going for six months because the market didn’t want to retrace far enough to trigger my stop.
The Moving Target Exit Strategy: Second Example With Strong Market Trend
The moving target exit strategy works well with breakouts and other entry methods known to produce volatility.
One of the first basics of technical analysis is to pick stocks that have good liquidity and volatility.
Once you’re filled, don’t rely on the moving target exit strategy for the first five days of trading.
Rely on your initial stop-loss level. Many beginners often get confused about when they should start looking for the 10-day low… That doesn’t start until the sixth day after you entered the trade.
Notice how the strong trend keeps the stock from making a 10-day trading low.
I picked this example because I wanted to demonstrate how a short-term trade can turn into a longer one.
If this happens, then great!
It’ll make you want to follow the first principle of trading, cut your losers and ride your winners.
I hope this helps!
For more on this topic, please go to: A Bollinger Bands Strategy to Give Your Portfolio the Boost It Needs and Why Technical Analysis Doesn’t Have to Be Complicated.
And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to!
All the best,
Senior Strategist, WealthPress