How do you choose your target prices? So many of them seem to be right on target, pardon the pun. That question seems to stump me every time. I have found many stocks setup to move but never know where to set my target price. (July 19, 2003)
First we look at market conditions. Is the market uptrending or downtrending, is the trend strong or modest? If we are playing upside in an uptrending market ourtargets will be different from an upside play in an overall downtrend. In the latter case we will shorten our initial targets simply because good moves attract short sellers.
We also look at the type of play we are looking at, i.e., is it a short term trade or are we looking to let it run as far as we can. In most cases we will let the stock continue to run as long as it keeps showing good action and is making enough gain relative to other plays we could be investing in (the opportunity cost factor), but there are some we enter strictly to take the short gain, something we do on the Technical Trader Report.
Then there are the factors particular stock. How far are its typical moves on each run (up or down)? Where is resistance or support (e.g., prior tops, upper channel, overhead suppy)?
We factor all of that in to set the target. Typically, if the marekt is trending higher and stocks are moving well, a breakout stock can move 15% to 20% before it takes a first rest. That is a general rule of thumb and it depends on the other factors above including just how expensive it is. It takes a lot less to drive a $5 stock with average volume of 200K 20% than a $65 stock with average trade of 20M. If a stock makes a fast 20% move on the breakout from a good pattern, it can potentially be a bigger winner. That is why we often use that 20% level as a litmus test or a first target if there are no other resistance areas or we feel the stock is strong enough that it should plow right through existing resistance.
From there we can take some partial profit. With options we often will do that because time is working against us, and if the stock comes back to test after the strong move (as is often the case) we lose not only value in our options but time as well. That makes it harder for the option to get back up to where it was on the first run. We can take a partial and let the rest run. Many stocks on the report now have hit the initial target where we took some gain, and then we let the run from there, looking for the next entry point as long as the stock remains solid.
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