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Regular readers and followers of my rants on Babypips know I don’t like price targets for exiting trades. I prefer the trailing stop method.
As discussed here.
If you haven’t read it, to sum up, the pitfall of target prices (IMO) are mostly psychological.
Yes, there’s a mathematical argument for letting profits run. But that isn’t the main issue for me at least.
By anchoring a price target in your mind, and along with it, a profit amount too, you’re regularly going to be disappointed.
And with disappointment comes frustration.
And with frustration comes revenge trading.
My theory why traders use target prices
It’s just a theory and likely a wild one.
But stick with me for a mo.
If you use a trailing stop it always means giving back profits. That’s the nature of trailing stops, unfortunately.
And some just cannot handle that idea.
Instead, they think through some nifty trading, they can outwit the market and get top dollar. They think they can call market tops and bottoms.
This is achieved by placing limit orders at support or resistance.
Or, by plucking out some figure from thin air, thinking that amount of profit will do them nicely.
I know. I am being very judgemental.
And I don’t actually believe they go around thinking this consciously.
It all occurs below the surface awareness and manifests simply as a preference for target prices over trailing stops.
There’s nothing wrong with preferences – except when they lead to potential trading problems (psychological).
My own aversion to exiting trades on price targets comes from one soul-destroying experience – I’ll write about it some other time perhaps.
That said, I’m not always against exiting the market via a trailing stop.
The art of exceptional trading is knowing when to follow rules, and knowing when to break them.
My overarching trading thesis
My guiding trading philosophy is this: low volatility always leads to high volatility.
The largest price moves come after quiet markets such as sideways moves, or price consolidations.
I see this type of price action as pent up energy.
In the same way, a ball kept underwater, at some point, resurfaces in a rapid launch into the air; a low volatility market does the same for price movement.
I honestly; truly; most definitely believe, volatility breakout systems are streets ahead for profit potential.
I capitalise on low volatility price action with Harami Inside Bar setups.
For others, it could be a coil, a spring, a triangle or wedge pattern.
It matters not, the result’s the same.
Zoom price explosion.
All this brings me to a recent trade I had in Zoom Video Communications.
I was lucky I was already long that stock, as price exploded on a Q2 earnings release.
If you don’t know Zoom, they’re one of the beneficiaries of this whole Covid-19 pandemic thing.
A US tech company, they specialise in video telephony, online chat and teleconferencing.
Just the sort of thing needed when governments force you to stay at home months on end!
And their Q2 earnings proved that.
A 169% increase in revenue in Q2, and with 81% of it coming from new subscribers, during the lockdown.
The stock literally zoomed 41% on the earnings news.
Take a look at the chart below.
I’m no stock picker – I just use Harami Inside Bars
The only reason I entered this stock was because of the price action days before the release.
And (slightly) because of the new Robinhood effect from millennial traders, affecting this sector.
It was not because of my superior stock-picking skills.
Personally, I’ve never used Zoom. Up until recently, I didn’t even know the stock ticker symbol.
But… when I see an inside bar I take it.
Because as my main trading thesis goes….. low volatility begets high volatility.
I entered the trade on the 28th of August.
Earnings were released 1st September.
My total points risk was 1184 ($303.96 (entry price) – $289.84 (protective stop loss).
And after the earnings broke, I sold at $434.84.
Netting a very cool 12,845 points.
That’s a ten-bagger. And on a ten-bagger, I exit – forget my trailing stop!
Exit on strength
It’s rare to see a capital gain like this. It’s even rarer to get it over only three days.
But should you ever be sitting on an 800% or 1000% profit (r-multiples of 8:1, 10:1), then it’s time to think about exiting.
Forget rules, forget trailing stops, just get the hell out. Chances are the move is over anyway – which is exactly what happened in this case.