Today's Quote: “A little uncertainty is good for everything." - Henry Alfred Kissinger.

In this section of the letter we are going to move on to some educational sessions on ‘targets’. Targets are one of the four basic necessities of any trade. Those four are the entry, stop, target, and management. Even among the best traders, very few are totally comfortable with the concept of setting and obtaining targets. There are a few very good reasons for this.

In the first place, the target area is never a perfect area on the chart. Every strategy we use has an exact entry and an exact stop (to the penny.) While we have to eventually pick a target to the penny, the truth is that the best we can do is find general areas that may slow or may stop a stock. We are never sure. This sets up the first problem with targets. We are always more afraid of what we don’t know. Since we have the ‘least’ confidence where a stock may go, we are always afraid of either missing a bigger move or losing current profits.

History imbeds that fear in us. How many of you have experienced taking profits on a trade at a projected target area only to see it rocket up three or four times beyond where it was? Like wise, how many times have you held on for a target only to see decent profits disappear? How do you avoid these problems?

If you are feeling pretty good about your technical skill and about your trading, but your account is not really ‘growing’, it is very likely that your Sharpe ratio is low and you suffer from an inability to manage targets in a consistent way. We will be discussing some ideas, not perfect answers, this week.