A trading friend of mine had e-mailed me something tonight which prompted this reply to him. Since it’s something I’ve been meaning to post here and add to one of the permanent sections, like How to Use the Site, I’m just going to paste my reply to him for now, until I can clean this up a bit and post it permanently on the site somewhere:
As far as my targets, I’ve been meaning to write something about this on the site. When I post multiple targets on a trade, like I currently have on some of the index 60 min – daily charts now, it doesn’t necessarily mean that I’m betting prices go all the way to the last target. Nor does it mean that I’m implying prices stop if they get to the last target (T3, T4, or whatever). Here’s the best way to say it: The markets, and hence my analysis of them, is dynamic, not static. Therefore, my targets, or I should say my final targets, can and often do change or at least “firm up” as prices approach them. Sometimes I will add additional targets as a trade plays out, even well before prices reach the original last target. Other times I might have initially listed 4 targets but decide to officially close the trade when the first target is hit. At times I will even add a new target in-line before the earlier target(s) as the trade plays out if I see something I missed or the market is doing something different that might affect that trade, etc, etc, etc…
Another way to put it: When I first post a set-up (pre-breakout) with, say 4 targets, I would put the odds that IF that set-up triggers, then the chances of those targets being hit, based on conditions when I made the first chart, at something like this: T1= 90%, T2= 75%, T3= 60%, and T4= 50%. Once again, that’s just a generic, off the top of my head probability but the point is that there is a very strong chance of the first target being hit and the chances diminish with each additional target. Sometimes as a trade plays out, I might see some technical evidence in both the broad markets as well as that specific trade that increases or decreases the odds of the additional targets being hit. I know it might sound over-simplified but each time a target (resistance on a long or support on a short) is hit and then exceeded (taken out), the odds increase sharply that the next target will be hit. Hope that helps (and makes sense!).