Hey folks,
This is a very common question that I frequently get each week: "How do you calculate your price targets?" . Today I would like to cover this and share some valuable resources and insight that will help you confidently calculate your very own targets on your trades!
It's actually quite simple, however just like many disciplines and strategies in trading, there's a lot more "art" and "finesse" to it than just a straight up science.
Keep in mind that market strength or weakness, moving averages such as 50 and 200 Day MAs, big volume gaps such as Power Earnings Gaps, a stocks current momentum, and a stock's short interest all can play a very big and important role in this. For simplicity sake we will just keep it straight forward with a few popular technical trading patterns for this educational post!
So here's a quick educational post on how to calculate price targets using classic technical analysis.
The first thing I do is make a list of technical patterns that work best for my trading methodology and have produced consistent results in the past.
Here is a short list of my favorite technical patterns:
These patterns are most common in strong trending bullish markets and they tend to follow through more often than not in trending markets. For the sake of this educational post we will focus on these 3 patterns today. You can click on each pattern listed and it will take you to that section in the post!
Bullish Flag pattern and calculations:
The bullish flag technical pattern is probably the most well know and widely used technical pattern in the market. Its simple to spot and easy to decipher. A bullish flag pattern in a continuation trend pattern. It shows up often in strong trending stocks. We can break it down into 3 simply segments.
First the "flagpole". This is the first segment of the pattern. Its also the segment where the range of the technical pattern is measured from, 1 to 1. For example if the flagpole measures $10 then the potential move or breakout measures the same.
The second segment of the pattern is the "flag". Which is essentially a consolidation phase of price. This is where price bounces back and forth between an often loosely held upper and lower trendline. Essentially the more successful tests of the upper and lower trendline the stronger the potential breakout becomes. This part of the segment allows you to measure your risk. A breakdown of the lower trendline is the failure of the pattern. A breakout of the upper trendline is the start of the potential continuation move!
The third segment is the "breakout". Like mentioned earlier the target of the breakout is measured from the break of the upper trendline plus the length of the first segment, the "flagpole". So for example if the flagpole measures $10 and the upper trendline breaks out above $100. The target is $100 (upper trendline break) + $10 (flagpole length) which measures to a $110 target.
Here's a recent example to study of a textbook bullish flag pattern in $AMD. Refer to this chart for a full technical breakdown of a bullish flag and price target calculations:
Bullish Pennant pattern and calculations:
The bullish pennant technical pattern is quite similar to a bullish flag pattern. Technically targets are measured the same but the price action between the upper and lower trendline tends to have much different characteristics. In bullish pennant patterns oftentimes you will get narrow ranged consolidated days often creating very tight price action right before the infliction point. A short series of inside days (where price moves within the previous days range but doesn't break the high or low) are often witnessed right before the breakout. The beauty of pennant pattern is risk parameters can be set much tighter allowing for aggressively sized trades. These trades tend to move faster so booking gains aggressively when potential targets are hit is necessary.
Some of the best bullish pennant formations happen shortly after Power Earnings Gaps.
First the "flagpole". This is the first segment of the pattern. Its also the segment where the range of the technical pattern is measured from, 1 to 1. For example if the flagpole measures $10 then the potential move or breakout measures the same.
The second segment of the pattern is the "pennant". Which is essentially a consolidation phase of price. This is where price bounces back and forth between an often tightly held upper and lower trendline. Essentially the more successful tests of the upper and lower trendline the strong the potential breakout becomes. This part of the segment allows you to measure risk. A breakdown of the lower trendline is the failure of the pattern. A breakout of the upper trendline is the start of the potential continuation move!
The third segment is the "breakout". Like mentioned earlier the target of the breakout is measured from the break of the upper trendline plus the length of the first segment, the "flagpole". So for example if the flagpole measures $5 and the upper trendline breaks out above $95. The target is $95 (upper trendline break) + $5 (flagpole length) which measures to a $100 target.
Here's a recent example to study of a textbook bullish pennant pattern in $NVDA. Refer to this chart for a full technical breakdown of a bullish flag and price target calculations:
Falling wedge pattern and calculations:
Falling wedge patterns often occur after a stock makes a steep but controlled pullback off of a recent high sometimes as much as 15% - 20% or more! The reversal out of the low tends to be an explosive. Remember, you're looking for this pattern to occur in strong trending stocks. Oftentimes strong trending stocks that pullback from a recent high will test the 20EMA and reverse from that spot. It can be considered a dip buying scenario.
When measuring the range for the target you use the lower and upper trendline at the previous peak. The price gap in terms of a dollar value between is what determines the potential price move into the target. Out of all of the technical patterns discussed in this blog post today this is the one that is more of an art than anything else.
Here is a recent example of a falling wedge pattern in $SMCI. You'll notice the stock made a high then made a steep 3 day pullback $1075 all the way into $700, over 30% from the high. It did so in a controlled manner and on the 3rd day the stock made an inside day candle. Day 3 of the pullback set this trade up. Using the low from the second day a stop of $675 could be used. Its important to remember that with these explosive short term setups, walking your stop up with the trade and booking profits is important. These tend to be much more volatile technical setups.
Falling wedge setups are excellent technical setups paired with the "Holy Grail" technical setup. They pair nicely together and you can read more about the "Holy Grail" setup here:
Here is a bonus chart for this week $AMD falling wedge and Holy Grail setup!
If you want to dive deeper into technical setups and the statistics and performance behind them "The Encyclopedia of Stock Chart Patterns" is a fantastic book to help with this!
The eBook that I personally wrote which covers 20+ years of my trading journey extensively covers my favorite bullish and bearish stock chart patterns to trade. You can find the link to that here, Inside the Mind of Trading Stewie.
I hope you found this educational step-by-step price target post helpful!
Cheers and happy trading!
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