Profit targets are similar to stoploss orders, but in the opposite direction. They’re pending
orders that automate the exiting process when we hit out profit goal.
Why would you want to exit a profitable trade? Because as we already established, the Pound
is volatile. We can judge with a fair degree of success when it will go in our direction, but we
have to be aware it will always go the other direction sooner or later. Setting profit targets
allows us to close a profitable trade at the point where we’re satisfied with the profits we’ve
already made – and exit before volatility takes us the wrong direction.
Remember, the London Forex Rush system aims to capitalize on two things: 1) The
correlation between the Tokyo range breakout and the likely trend for the London session,
and 2) the high volume in the first two hours of trading. So we aim to make most of our profits
fast and early, then get out. History shows this is the most sensible plan to give us the best
chance to build long term profits.
Just as we saw with our stoploss placements, our exits also allow both aggressive and
conservative approaches.
So, how do we set them? Let’s elaborate on this topic in detail:
Different currency crosses pour in different average daily moves. That means that while some
might move 150 pips per day as an average (such as GBPUSD), others might move over 300
pips per day (such as GBPNZD). By averaging how many pips any particular currency pair
has moved per day over the last X number of days (14 days is a commonly used number), we
can arrive at the “average daily range”.
We use the average daily range to determine our target profits. Here are the two ways of
setting our targets:
1. Aggressive target placement: the aggressive approach seeks to exploit the full
amount of the average daily range. Imagine we were seeking to enter a long (BUY)
trade: we would calculate the average daily range (in pips) for a particular currency
cross for the last 14 days; then we add that number to the Tokyo low for that day (or
Tokyo high is it was a SELL trade). The resulting figure gives a potential point where,
as a statistical average, that currency pair might be expected to run out of steam. So,
by setting our target aggressively, we’ll want to place our exit point just a little before
that point, to be on the safe side.
2. Conservative target placement: the conservative approach is also based on the
average daily range, but considers a psychological factor as well. It takes into
consideration the “round number phenomenon”. Round numbers are those price levels
ending in “00” or “50” (for example: round numbers for GBP/USD would be 1.9700,
1.9750, 1.9800, 1.9850, etc). The “round number phenomenon” suggests that once the
price has broken a round number, it tends to gravitate towards the next one. Moreover,
if price can not break through a round number, chances are that it will fall back to the
round number immediately below. Well, the conservative approach of placing our
targets takes them into consideration so we exit the trade few pips before hitting a
nearby round number in case price does bounce off that level.
Let’s look at an example.
Let’s say we take a long entry on GBPUSD at 1.9715 - that’s our starting point. Now, let’s say
we calculated the average daily range, and by adding it to our Tokyo low, it takes us, in theory,
all the way up to 1.9815 – which would be a gain of 100 pips.
The aggressive way of placing your profit target would be to set it just shy of 1.9815, at a
number like 1.9810.
The conservative approach would suggest we exit the trade few pips before 1.9800 just in
case the price does indeed finds resistance there and falls back.
I am a firm believer in the round number phenomenon. The markets are run by humans and
are susceptible to group psychology. Therefore, I recommend using the conservative
approach to setting your exit levels. I feel that in the long run, they will grow your account
further than an overly aggressive approach will.
To see the round number phenomenon in effect, have a look at the GBPNZD chart below:
As you can see, the entry was taken as the price broke out of the Tokyo range in the direction
of the down-trend. Now, the average daily move for this currency pair indicated that price
might drop all the way down to a level a bit below 2.5000.
By setting the profit target conservatively – in this case, 5 pips before hitting the 2.5000 round
number at 2.5005 – we can see how a potential loss was turned into a gain. Notice that the
price did in fact find support and bounce back up from the 2.5000 level. Psychology can be a
stronger market force than momentum so it’s best to take that into consideration.
One last point of clarification: even though we’re only looking for entries when a breakout
occurs in the first two hours of the London market, don’t expect your profit target or stoploss
to be hit within that time span. Usually, the trade will remain open for few hours after the two
hour entry window closes. This is normal and furthermore acceptable. Remember, we were
using that window of high volume only as a predictor of the overall daily trend, not as a profit
target time frame.
Both the U.S. dollar and the Japanese yen continued their growth on the Forex market today as the yesterday’s stock trading sessions were negative and today’s Asian session ended in the red zone.
The New Zealand dollar rose to the highest level since early January 2009 today, backed by the support from the continuously growing emerging and developed stock markets.
The South Korean won declined today against the U.S. dollar after rising for the whole week after the country’s government said that the current investors’ outlook for the economy are too optimistic.
The British pound rose today against the other major currencies as the house prices demonstrated growth for the first time since October 2007 in United Kingdom this March.
The single European currency declined today to the levels close to its 2-week low before and after the report on Eurozone February unemployment negatively surprised the traders.
The Malaysian ringgit reached its monthly high today on the traders’ speculations that the demand for the emerging markets’ assets will increase as the recession eases.
