Setting Targets When Dealing With A Void
by Cliff Clark
I've been told by a couple of traders recently that they are having issues setting targets when dealing with open space or a void on a chart. By open space, I'm referring to the lack of support or resistance off to the left, which make setting targets somewhat easier.
The scenario I'm talking about occurs most often when you are dealing with all-time highs, though it can occur in other situations. The question is, how do you set your targets under these circumstances? Very simple, you can use the stock's recent history to assist you in predicting where it could go.
Let's say you are buying a stock that breaks out above a base that's at an all-time high. You know that if this trade goes well, you'll be taking profits at a new all time high. But how high can it go, if you take 2R or 3R targets can it move that high? Start by observing and measuring the price action that brought the stock up to the current base. The rally that preceded the stock's consolidation at the all-time high will be a very valuable clue to tell you what traders tend to do when this stock makes it's big rallies.
In fact, there were probably several rallies that brought the stock to its current level, each was interrupted by some form of correction or consolidation. The majority of the time, you'll see a fairly consistent pattern, distances that are symmetrical. You may see that the stock tends to rally 20 points, then give back 5 or 6, then rallies another 20 points. If this is the case, you'll want to make sure your 2R or 3R target isn't beyond 20 points.
The same would be true in the case of a short trade on a breakdown scenario.
This is a good approach if you are picking targets where there aren't any support or resistance clues to work from. Use the stock's recent history as your guide and project it's past performance into the future. The stock won't always repeat the same behavior, but you have to have something to work from. This method often proves to be very effective when you don't have much else to work with.
2 trades for me today with +1.5R total
1st Trade QCOM +2R
148.39/149.97 exit 143.25
12% gap down under pivot support and 50ma after a strong daily double top rejection,. I took it on a congestion breakdown with a fairly wide stop, leaving my 2R target 50c over its ATR, slow but consistent move down with great RW, hit my target on the penny before it bounced.
2nd Trade AQB -0.5R
9.40/9.70 exit 9.56
I rarely trade stocks under $10 and even more rarely short them. I liked this daily chart as it broke its uptrend channel and stayed under a strong 9.50 support line enough room to its daily 50ma. I entered after a pullback with a fairly wide stop but only 1/3 of its ATR used at the time. It failed to break down with the strong market open and stayed in a narrow range.
I actually broke my plan with this trade as I lowered my stop to a pivot where price made a big bounce earlier at 11am with a large seller sitting there. My thought was that if it breaks that level again then it will likely...
1 trade for (-1R)
I took a BD on QCOM. I was worried about the target being close to the daily range, so I took a tighter stop on the 2 min chart. I am looking through PTS right now, most of the examples have 2 options for where to put your stop. It looks to me like one of the stops would be at the bottom of the main consolidation area, and the other at the bottom of where there has been a shakeout or turnaround bar (if there has been one). Due to the daily range I took the tighter one on this. In hindsight it seems obvious to take the wider stop, but in the moment it looked ok.
I was then looking at the 15 min 3BP on QCOM, but the reason I used a tighter stop in the first place was because of the range. The 15 min 3BP would have needed to have gone even further than the wider stop on the 2 min BD, so I didn't take it.
