I have recently heard from a number of traders regarding the challenge of setting effective targets for their trades. What would happen in most of these situations was that the trade would go in the trader's direction and be profitable. This leads the trader to hope for further gains and sometimes adds to the position. At this point, the trade reverses and leaves the trader with no profit or even loss. The frustration caused by these “volatile” market conditions can fuel subsequent poor decisions and excessive losses.
This is one situation where the best psychological strategy is also the best trading strategy. It is necessary to study the markets and the instruments you are trading and determine how far movements in different systems are likely to reach in terms of volume and volatility. If you are trading a stock index, such as the SPY ETF or ES futures, the VIX market will be highly correlated with the average volume of moves in any time frame. Likewise, the size of the instrument will be completely related to the size of the market movements. If SPY is trading an average of 70 million shares per day, for example, you can do very basic research and realize that daily moves of more than 1% would be difficult to achieve of that size. For a day trader, if today's trading volume is not much larger than recent volume and you get a breakout move of more than half a percent in a 12 VIX market, you know that the conditional probability of the move moving more in your favor is very low. If the VIX is greater than 20 and trading volume exceeds 100 million shares, you will be on stronger ground for further gains.
One thing I have found very useful in my trading is knowing the expected holding period of a trade and knowing specifically how much directional movement to expect during that period. Across different segments of the market day. An expected one-hour holding period would result in larger stock movements during the early morning hours, for example, compared to midday. By studying the magnitude of market movements for certain holding periods, volume and volatility levels, and for the time of day, I can set rational and reasonable profit targets. This automates the exit process, avoiding the major pitfall of making execution decisions in the heat of battle.
The key is to make trading a plan and not a reaction. Once you have a plan, you can mentally rehearse it and base your exit on a reasonable goal, not a wish. Trading becomes emotional when we act on hopes and fears rather than hard information. A trade exit should take into account what the market typically offers you; Expecting more is perfection and setting yourself up for disappointment.
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