Where do I place my target when the price of a stock breaks out of a technical chart pattern?

By Casey Murphy AAA
A:

Technical chart patterns such as ascending triangles, head and shoulders and double bottoms have rapidly grown in popularity among individual investors, but the biggest challenge when using these patterns is deciding when to exit an existing position.

Many different targets can be used when using technical chart patterns, but the most popular method is to measure the height of the pattern and either add it to or subtract it from the breakout price.

Let's look at this chart as an example: a trader who is able to identify this ascending triangle will set his or her target near $25. This target price of $25 is calculated by taking the height of the pattern of $2.60 ($22.40 - $19.80) and adding it to the entry price of $22.40.

pricetarget.gif

You can also use the height of the pattern to calculate the target on patterns that predict a downward trend, such as a head and shoulders pattern; the only difference is that the height is subtracted from the entry price rather than added to it. Many conservative investors use the height of the pattern to calculate their maximum target, but often choose to close out their position earlier, ensuring that they lock in their profits.

To learn more about various chart patterns, see Price Patterns - Part 1 and our Technical Analysis tutorial.

RELATED FAQS

  1. What does a double bottom tell a trader about the overall trend?

    Learn how a double bottom pattern forms on a price chart and why many traders consider double bottoms to be a sign of reversal ...
  2. What are the main differences between a double top and a double bottom?

    Identify double tops and double bottoms, and learn what each could mean for the security's current price trend. Discover ...
  3. What are common trading strategies used when identifying a double bottom

    Use simple, low-risk trading strategies to take advantage of a double bottom formation. Traders typically take one of these ...
  4. What is a common price target when identifying a double bottom?

    Learn how to identify a double bottom stock pattern and where to set a target selling price point to get the most out of ...
RELATED TERMS
  1. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  2. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  3. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...
  4. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...

You May Also Like

Related Articles
  1. Forex Strategies

    How to Build A Forex Trading Model

  2. Trading Systems & Software

    The Best Technical Analysis Trading ...

  3. Trading Strategies

    Is the Stock Correlation Strategy Effective?

  4. Trading Strategies

    Not All Online Trading Brokers Are Created ...

  5. Trading Strategies

    Novice Trading Strategies

Trading Center