Forex and Calculating Profit Targets

I like the old saying that, "You make your money when you enter a trade, but you get paid when you exit." Getting into a trade is simple but it isn't always easy. Let this help guide you. Just jumping into a forex position will not necessarily make you money. Just like trading anything else, you have to get it for a good price, and sell it for a better one. And that holds true whether you are long or short. You won't make any money if you get into a trade at a bad price.

But the other half of the equation is actually getting paid. We should have an idea of our price targets before we ever enter a trade. If we don't then we have no way to calculate our reward-to-risk ratio.

So how do we set them?

Let's take our last euro trade as an example. We were looking at the formation of a head and shoulders pattern last Friday, May 21, 2010. You may recall, it had not completed it's formation yet. From a technical level, you would not consider the formation complete (nor enter trade) until the shoulder line is broken. In this case the shoulder line was at 1.2465. When we entered the trade at 1.2535, the right shoulder was showing mild weakness. given the overall weakness in the euro, a forecast of more weakness ahead was not rocket science.

So we entered a bit early, banking on that continued weakness, and scored an extra 70 pips. Then, when the price action broke the neckline (which it took 7 hours to do), we were really off to the races.

On a bead and shoulders pattern, here is how you set your price target. Measure the distance from the neckline to the top of the head. That's it! If you have 200 pips from neckline to head, just subtract the 200 pips from the neckline figure, and there's your target.

Now, the formation doesn't guarantee a profit of any size, so you have to keep an eye on your trailing stops. We have not yet reached our h-and-s profit target, so we will continue to monitor the trade. However, if strong euro weakness persists, we could see this fall all the way to 1.2141, as it looks to match the yearly low. At that point we could be putting in a double bottom, a strong bullish sign at the end of a run, or if more weakness is pervasive, we would look to extend the fall with 2 Fibonacci extensions.

We've talked about them a little before, but we'll go more in depth on them tomorrow. For today, just tuck the head and shoulders formation and price targets into your arsenal, and we'll thank God for his generosity in this trade.

Until next time...Happy Trading!

Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com