How to Determine Profit Targets at All-Time Highs or Lows

Chart on chalkboard showing all-time highs

Happy Friday!

This week’s question comes from Adrian, who asks:

How can I determine a profit target if a market is at all-time highs or lows?

One of the most effective ways to find profit targets is to use key levels in the market. A resistance level can serve as a target in an uptrend while support is used to find targets in a downtrend.

But what if there are no key levels?

You won’t have the luxury of using support and resistance in a market at all-time highs or lows.

The good news is that you still have a few options.

By the time you finish reading this post, you will have learned three methods for taking profit in a market that is making all-time highs or lows.

Read on for how to find profit targets without using support or resistance.

1. Look to Fibonacci Extensions

I started experimenting with Fibonacci extensions in 2016. I didn’t use the tool often, but did find it helpful in situations where there wasn’t a lot of price action near a potential target area.

Like Fibonacci retracement levels, extensions can also be used to confirm key areas in the market.

Think of extensions as a way of identifying targets while retracements are used to find entries.

Simple enough, right?

It’s a two-step process. The first step is to find a market that respected a Fibonacci retracement level.

Here we have the USDCAD weekly chart:

USDCAD fibonacci retracement tool on weekly chart

Notice how buyers stepped in at the 38.2% Fibonacci retracement. Because it’s an uptrend, I dragged the Fibonacci tool from the swing low to the swing high.

With that information in hand, I can figure out the extensions by dragging the tool from the swing high (2) to the subsequent swing low (3).

USDCAD fibonacci extension tool on weekly chart

Notice how I dragged the Fibonacci tool from the swing high (2) to the low (3). That gives me extensions like the 161.8% handle to identify profit targets.

Note how the USDCAD found selling pressure right at the 161.8% extension in the chart above. A take profit order at this extension would have worked nicely.

Now let’s take a look at a market that’s in a downtrend.

Here we have the CADJPY weekly chart:

CADJPY fibonacci retracement on weekly time frame

The first step is to drag the Fibonacci tool from a recent swing high to the subsequent low.

As you can see, the CADJPY encountered selling pressure at the 61.8% Fibonacci retracement.

Now that we know the CADJPY is respecting our Fibonacci levels, it’s time to plot our extensions.

The second step is to drag the Fibonacci tool starting from the last swing low (2) to the top of the 61.8% move (3).

CADJPY fibonacci extension tool on weekly chart

Just like that, you have two potential targets in a market carving all-time lows. Notice how the 261.8% Fibonacci extension was particularly significant.

You will have to use some discretion here. While Fib extensions can be helpful, there are several divergent schools of thought on how to use the information they provide, which means it’s potentially less reliable than other methods.

However, extensions can prove incredibly helpful when you have no other options.

2. Use a Measured Objective

One reason I favor flag patterns, and even the head and shoulders reversal, is because of the objectives they offer.

Take the GBPNZD ascending channel below as an example.

Objective for ascending channel

You simply measure the distance of the flagpole which in this case was 1,070 pips. You then plot the same distance starting at the top of the channel.

If this had occurred at an all-time low in the market, you could use the objective to take profit.

Objectives like the one above are quite simple to use. As long as you draw support and resistance correctly, there isn’t much ambiguity when determining the final target.

You can even use a ranging market to find an objective.

EURJPY range objective on daily chart

Note how the target is found using the height of the range. In the case of the EURJPY above, that was 300 pips.

If this had formed at an all-time high in the market, you could use the objective as a profit target.

Again, we’re just using the height of the range to find a profit target. Simple stuff, right?

While this method of exiting the market won’t always be feasible, I do prefer it over Fibonacci extensions. In my experience, objectives like the ones above tend to be more reliable and less ambiguous than extensions.

3. Trail Your Stop Loss

Unlike the last two options, this one is always applicable. You can trail your stop loss regardless of whether you have a reasonable Fib extension to aim for, or an objective from a technical pattern.

I always trail my stops even when the market isn’t carving all-time highs or lows. It’s an excellent way to protect your capital and lock in some profit as the market moves in your favor.

However, trailing a stop loss isn’t quite as easy as it may seem.

The idea of moving a stop loss order closer to the current price is straightforward enough. However, figuring out how far back that order should be placed isn’t so easy for most traders.

Should you place it one daily candle back or three? Or should you use key support and resistance levels instead?

Like most aspects of trading, there is no one-size-fits-all answer. It depends on the state of the market, distance from the target and your personal preference. Even market volatility plays a part.

Here are a few questions I ask myself when trailing a stop loss:

How has the market behaved recently?

You can learn a lot from observing the last few weeks or even days of price action. It can tell you how far the market moves each day on average as well as how it reacts to the mean.

This is valuable information when trailing a stop loss. In fact, it may be all you need in order to figure out how far back you should trail it.

Take the USDJPY below as an example.

USDJPY trailed stop loss on daily chart

Notice how the pair formed a bullish pin bar at support amid a steady uptrend. If you look at the week prior to the pin bar, you’ll notice that prices tend to stay above the previous day’s low.

So as long as you keep your stop loss behind yesterday’s low, you should be okay. As soon as one day closes (New York 5 pm EST), you’d want to trail your stop below that low.

There is some discretion involved here. It also depends on your preference. Nothing says you can’t place your stop two days back rather than just one.

Is there any upcoming news?

This one is debatable compared to the others. If you’re trading the EURUSD and there is a European Central Bank decision coming up, you may want to give the pair a little more breathing room.

So, if you had your stop loss 80 pips behind the current price, you can think about increasing it to 100 or maybe 120 pips.

Remember, we’re talking about a trailed stop loss here. That means the position is already in profit. You should never move an initial stop loss further away from your entry.

What was the original distance from the entry?

A simple method of trailing a stop loss is to keep the distance the same throughout the trade.

So if you start with a 100 pip stop, you would maintain that distance until the take profit order is triggered.

You can use the daily closing price at 5 pm EST to calculate the distance. Each time the market ‘closes’ at 5 pm EST, you would reset your stop loss to be 100 pips away from the closing price.

If you trail your stop correctly in a trending market, there’s little need for a profit target. The stop becomes your best defense and offense when a market is at all-time highs or lows.

Don’t be afraid to let the stop order take you out of the trade. Odds are you will be able to book more profit with a trailed stop loss than the other methods discussed in this post.

Final Words

Trying to determine a profit target when a market is at all-time highs or lows can be tricky. However, the three methods listed above will allow you to extract as much profit as possible without guessing.

Fib extensions can be useful in these environments because they use past price action to determine future targets. Bear in mind that this method is a bit more arbitrary than using objectives and is therefore prone to failure.

If you’re trading a range break or flag pattern, you can use an objective. This is the approach I prefer, but it isn’t feasible in all situations.

When all else fails, trail your stop loss order. You should be doing this regardless, but when the two methods above aren’t possible, this is the best option in my experience.

Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
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