Applying a Degree of Confidence to Price Targets

 

I don't care how good your analysis is. There are NEVER any certainties that a target will be hit.

So let's look at a little technique which can help your decision making during both the trade planning and trade management phases.

This article idea was prompted by some great email Q&A I received recently.

Let's start with the email question and response. I'll then expand upon part of my reply, as I think it's an important topic that deserves further discussion.

EMAIL IMAGES:

The email included a 30-minute Higher Timeframe chart. It's not reproduced here. It's sufficient to know that the higher timeframe is in an uptrend.

The following is the 3-minute Trading Timeframe chart showing the prior day in the left half and the current day to the right.

Click on the image if you want to open a larger copy in your browser… or just skip down lower to where I've zoomed in to the current session.

<image: Email Trade Image>

Let's zoom in now to show just the current session:

<image: Email Trade Image>

The question is quite clear from the text on the image, but just to be sure I'll include the email text as well:

EMAIL TEXT:

As per chart on 17th I was long on the days range low also the price was above the previous day close. So decided to go long on range low (865 with sl 862) as the major trend in 30min was in up trend. So I was right in my analysis however and kept my position open even though price hit the range high of the day with the expectation of reaching the target of 874. However it didn't went as per the expected and my SL got hit and post my SL hit , price went till 875 and hit achieved my TGT. Sir if I m wrong and my SL get hit I can understand that, however if I m right and my SL space is right and my Sl get hit and post that TGT is achieved . How to handle these kind of situation?

SO HERE'S THE SITUATION:

<image: Email Trade Expectation and Outcome>

I must say… I love the trade entry. From a YTC perspective it's aBOF of the low of day support, coinciding with the prior day's high resistance, in the direction of a longer-term uptrend.

Very nice trade idea!

The following was my response:

EMAIL RESPONSE:

You ask, "How to handle this kind of situation?"

There is no "situation" here. What has happened is completely normal in the markets. The nature of price is that it often involves tests, retests, probes, spikes and all manner of action that traps people and stops them out before going on to the target. This is completely common.

How I would handle it (accepting that this is hindsight analysis and I didn't actually trade this market):

(a) The market on this trading timeframe is ranging. You entered beautifully. But I would have taken at least partial profits at the range high. It's the nature of ranging markets that they will continue to range, until orderflow triggers the breakout. There are no certainties in the market. So while you identified a good target much higher than the upper range boundary, surely you MUST have in mind the potential for the range resistance to hold. In that case, take part of the position off.

(b) And then being stopped out on the remainder, why did you not get back in? There's a beautiful re-entry just after 14:00.

Look back through my site. There are numerous articles along the theme of sometimes trades take multiple attempts. Here's one of the recent ones – http://yourtradingcoach.com/trader/how-i-think-on-trade-exit/

Sometimes a trade takes two attempts!

LET'S EXPAND UPON ONE KEY POINT

This is the point of today's article.

As mentioned earlier… I don't care how good your analysis is. There are NEVER any certainties that a target will be hit.

So here's a little tip which can improve your decision making regarding targets. After selecting your target, apply a degree of confidence.

For the example above, instead of saying "the price target is 874", the trader might have said "the price target is 874, with a 70% degree of confidence".

Or whatever other percentage they thought was appropriate.

The thing is – it's NEVER 100%.

In fact, I'd go as far as to say you should never select more than maybe 80%.

How does this benefit you?

It forces your mind to accept the possibility that the target may not be hit. If we selected the target with a 70% degree of confidence, then this means there is a 30% chance it won't be hit. So in planning out the trade we might consider alternate IF-THEN scenarios involving possible exits at the range highs, should they fail to break.

Give it a try. See if this helps improve both your trade planning and your subsequent trade management decisions.

And for more advanced application… continue to update that degree of confidence as more data unfolds in real-time.

Good trading,

Lance Beggs

 


 

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5 Comments to “Applying a Degree of Confidence to Price Targets”

  1. Chris N says:

    Regarding the following (b) And then being stopped out on the remainder, why did you not get back in? There’s a beautiful re-entry just after 14:00.

    Since the swing low at 864 (that lead to the high at 870) was broken after the strong move down and the retracement back up to 864 looked weak, would it be wrong to say there was an objective trend change to the downside that might stop one from taking longs?

    • Lance Beggs says:

      Hi Chris,

      Great question.

      Just firstly, the trader discussed is not trading the YTC method. Most of my readers aren’t (I’m crap at marketing and selling, I guess). Unless I completely misunderstood his Q&A, he’s attempting to find a structural entry LONG in the direction of the higher timeframe trend.

      So from his perspective there is never a short opportunity. There is only a re-entry LONG opportunity when the move below the range boundary fails.

      But let’s look from the YTC PAT perspective.

      I would have absolutely no problems with someone looking for entry SHORT at this point you identified. I would be myself. The structure up until the break down was a sideways trend between 864 and around 869. The break below 864 was with strength. And price held below that level long enough for me to say that we have price acceptance and the trend is down. So I’d be seeking breakout pullback opportunity SHORT during the weaker retest of 864, exactly as you suggested.

      As we see though, with the benefit of hindsight, any entry SHORT would have stopped out as the breakout move fails and price re-enters the sideways range.

      There are two outcomes then for someone who did enter SHORT. (a) Take the stop out, reassess and wait for the next opportunity. Or (b) take the stop out, but recognise that the change of structure from downtrend back to rangebound sideways trend represents opportunity immediately, and therefore enter LONG. This entry LONG is far more aggressive. And hard to do, given you’d just have taken a loss SHORT. But it was there for anyone who recognised it.

      Of course – as mentioned in the article – this is not my market and so all my comments are made with the benefit of hindsight. Would I have been alert enough to recognise entry LONG? Who knows? I’d like to think so.

      But would I have any problems with anyone looking for a SHORT here and failing to catch the LONG? Not at all. They take a small loss. Move on.

      Cheers,
      Lance.

      • Chris N says:

        Thanks for the reply. I guess I always think most of the readers are YTC traders. And I agree with the failed short – reassess and adjust my bias as needed. I don’t know if I’d be quick enough to get long right away here, but I’d be looking for weak pullbacks to go long, waiting to see what happens if price moves back to the upper edge, etc.

  2. Michael says:

    Lance, I’d like to add what I normally do in practice, that in my experience works really well… Of course, please correct anything wrong I may be saying here! 🙂

    Targets are useful first of all to estimate Risk/Reward of a trade to see if it’s even worth pursuing it, secondly to ensure profits are maximized by exiting while there is still momentum in our favor.

    The second point I mention above, is key and should be stressed in my opinion: *a trade is a good idea only as long as momentum stays favorable to it. Not one tick longer than that*.

    Following the above principle: I set my target and initial stop, then I trail that initial stop using the higher time frame candles as they develop.

    The idea is, assuming a LONG position: as long as there is strong momentum in my favor, the candles in the higher t.f. will show higher highs and lower lows. so, every time a new candle in the higher time frame forms with a higher high and higher low, my stop gets updated to sit just one tick below the low of such candle. If no higher high is formed, I won’t touch my stop and wait for momentum to either resume or stop me out.

    If a candle forms a lower low in the higher t.f.: momentum is becoming too weak for me to still hold my position until it hits the target I set. So, I want out – which is accomplished by my stop trailing process.

    All this takes in to account uncertainty, while at the same time retaining the best possible chance for my trade to hit the profit target . If momentum starts shifting, I want out: Just because I saw an opportunity 10 candles ago, there is no guarantee at all that momentum will stay the same until my target is hit. It’s not like the market should “reward” me for being so clever in selecting my target! :-)))

    My time frames, these days: 1 min for the trading time frame, 5 min for the higher time frame (the one I use to trail my stops), and 60 min for my “long term” trend assessment time frame.

    Hope this helps everyone! 🙂

    Michael

    • Lance Beggs says:

      Hi Michael,

      Thanks for sharing that. The simplest tools are often the best. And trailing a stop via any higher-timeframe candle which makes a higher high & higher low, is about as simple as it can get. And quite effective at identifying loss of momentum. It’s a nice compromise between “close enough to not give back too much” but not “too tight that it stops out while momentum is still in play”.

      Great stuff.

      Lance.

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