As prices in the Indian equity markets approach the previous highs set in 2010, there are a lot of stocks that are making 52-week or even all-time highs. As traders, we know that we should participate in the dominant trend but base our exits on supply and demand zones. But where are we supposed to exit when we do not have a zone as a signal?
Fortunately, there are several techniques that we can use to identify probable exit point to protect our profits. Remember, none of these are as strong as actual supply zones but they do seem to offer higher probability targets when we are breaking out into unknown territory.
The first method is one of the easiest. Before prices break to new highs, it often pulls back to gain momentum. If you measure the depth of the pullback and then project that same length at the breakout, it will often mark the area of the first correction after the breakout.
The next method offers multiple targets and uses a tool that is available on most software platforms. The Fibonacci extension tool measures the impulse prior to the breakout and then projects certain measurements of that impulse from the recent lows. By doing this, you can often identify the area where the breakout impulse will stall.
The last method is to simply wait for a signal that the trend has been broken. Moving averages offer a summary of the current trend and the mean price. In a bullish trend, prices should move away from an average and then snap back to it but not close below the moving average. This is called reversion to the mean. If price breaks the moving average by closing below it, then the trend has likely ended.
There are two problems with this technique. First, you will never exit at the top of the move since we wait for a pullback to trigger the exit. That is fine though as we can still participate and profit from the majority of the move.
Secondly, is the choice of the moving average period. We need to select a period or length of the moving average that price will respect for the trend. Stocks and timeframes differ and one moving average may not work for all securities. There are some advanced techniques for finding the best length but I will save that for discussion in our courses.
So if the price of your security breaks to new highs, you might now be better prepared to take your profits at the right time rather than trying to guess. To learn more, contact your local Online Trading Academy center and enroll in the Professional Trader course today.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD turns negative near 1.0760
The sudden bout of strength in the Greenback sponsored the resurgence of the selling pressure in the risk complex, dragging EUR/USD to the area of daily lows near 1.0760.
GBP/USD comes under pressure and challenges 1.2500
GBP/USD now rapidly loses momentum and gives away initial gains, returning to the 1.2500 region on the back of the strong comeback of the US Dollar.
Gold retreats from highs on stronger Dollar, yields
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XRP tests support at $0.50 as Ripple joins alliance to work on blockchain recovery
XRP trades around $0.5174 early on Friday, wiping out gains from earlier in the week, as Ripple announced it has joined an alliance to support digital asset recovery alongside Hedera and the Algorand Foundation.
Week ahead – US inflation numbers to shake Fed rate cut bets
Fed rate-cut speculators rest hopes on US inflation data. After dovish BoE, pound traders turn to UK job numbers. Will a strong labor market convince the RBA to hike? More Chinese data on tap amid signs of slow Q2 start.
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