Example:
A stock has moved through a level of resistance at $9.92 and and pull back in to test that level. That level holds and you decide to get long at $10.00 with 100 shares and set your stop loss at $9.80 with the idea that price will move to $11.00.
Stop is $9.80, meaning risk is 20 cents in the trade ($20.00 of your capital)
Price Target is $11.00, $1.00 from entry and five times the risk amount from your entry (a "good" entry for a trade is when the price target is more than two times risk)
1st Profit Target: when 1:1 reward/risk is reached, in front of the previous high ($10.20)
- closing 25% of your position when you've reached 1:1 risk reward means you've profited $5.00 in the position and cut your risk in half without moving your stop
- 25 shares sold at $10.20; $5.00 profited
- 75 shares remain from $10.00, risk is till 20 cents below there at $9.80
- 20 cents x 75 = $15.00
- $15.00 - $5.00 profit from selling 25 shares at 1:1 ration = $10.00 risk
2nd Profit Target: when the previous high of day breaks and the price extends to 2:1 reward/risk from your entry ($10.40)
- closing 50% of your original position when 2:1 reward/risk is met means you've profited $25.00 and reduced your risk even further
- 25 shares sold at $10.20; $5.00 profited
- 50 shares sold at $10.40; $20.00 profited
At this point in the trade you can do a couple different things:
- leave you stop where it is
- with 25 shares left in the trade your risk is now $5.00 from your entry at $10.00
- 20 cents x 25 shares left trading
- move your stop up to your entry
- this reduces your risk to nothing but gives the stock less room to work
- if price moves back to your entry you stop out and would profit $25.00 in the trade
- 25 shares sold at $10.20; $5.00 profit
- 50 shares sold at $10.40; $20.00 profit
- 25 shares sold at $10.00; $0.00 profit
- move your stop to your first take profit price. Again, risk is reduced entirely but the stock has even less room to work, however, minimum profit here is $30.00
- 25 shares sold at $10.20; $5.00 profit
- 50 shares sold at $10.40; $20.00 profit
- 25 shares sold at $10.20; $5.00 profit
3rd Profit Target: when your initial price target it reached or the charts show a clear change in direction. If your profit target is reached at $11.00, you'll profit $50.00 in the trade.