Chapter 30
Profit Taking and Profit Targets
All pullbacks and reversals begin with profit taking. Experienced traders look to exit on strength, and then look to reenter on a pullback. For example, if a bull trend is just beginning and is especially strong, bulls will buy more as the market breaks above the most recent swing high. However, as the trend matures and develops more two-sided trading, they will no longer buy on a stop above the most recent swing high. Instead, as the rally weakens, they will look to take some profits above that high, or even a little below. If most bulls are taking profits around the previous high and not buying more on the breakout, the market will begin to have a pullback. This means that the bulls would rather buy at a lower price and they believe that there will be a pullback that will allow them to do this, so they are no longer willing to chase the market up, buying above prior highs. If the profit taking is very heavy and if there is aggressive, relentless shorting as well, the pullback will grow into a large correction (a trading range) or even a reversal. Bulls will also look to take profits on any sign of strength, like at the close and just above a large bull trend bar, or at the close of the next bar or two, especially if it is a small bar or has a bear close. They will take more profits below the low of the next bar. This is why so many large trend bars, which are breakout attempts, are followed by small bars and pullbacks, which means ...
