1. Price target is only accurate at the time it was given
In other words, it is not cast in stone and may change after it was given.
When price target was given, it is based on all available information available with the price target was mentioned. Any new information that is available after the price target was given may change the price target.
Let us use the example that I am driving to KL. It normally took 5 hours to reach there, so when I left Singapore at 7 am, I projected that I will reach KL around 12 noon. Does it mean that by noon I will be definitely at KL? Well, that depends on there is nothing unexpected happened during the trip. If there is a huge jam at the highway, I may not be there at noon. So the time projection can be wrong. If I receive a call (new information) that ask me to meet at Malacca, or even worse I need to return to Singapore immediately, then I may not reach KL. So that location (price) projection may be wrong again.
Please note also that we are ruling out any foul play, and any incompetence or oversight of the one who gives the price target. We are just talking about someone trying to make the best interpretation/analysis here. Thus if we take this into account, we have to be very careful when incorporating price target given as part of our trading plan.
2. Can price target be projected?
There are two main schools of thoughts here: one is price target can be projected, one is price target cannot be projected.
Those subscribed to the first view can get price target from various patterns, trend lines, use of fibonacci numbers, elliott waves etc. Those subscribed to the later view is that the trader has to react to the price action and act when Mr Market tell him to do so, regardless of what the price is.
My view is a mix of the two. We can use patterns or whatever to do price projection, but please take the price target mentioned with a dynamic view. Price project helps to calculate the risk/reward ratio, and raise the alert level as price reaches a predetermined price point. The actual entry/exit signal as to be taken from the market's action.
Let us see how this is done at various stages of trading after pattern recognition.
At the beginning of a particular pattern movement, if price does not perform as expected, we have to admit that we had misread the pattern and we are wrong. Even we are right about the pattern, there is still these things called pattern failure, false breakout etc. So Mr Market is always right and we have to act accordingly.
Now if the price does move as expected, but have not reach the the projected price target start showing signs of reversal. We have to examine to see if the pattern had changed from one to another, or the time frame we use to see that pattern is not appropriate. EW technician is famous for this and they call it waves recount. But the most important point here is, we have to listen to Mr Market and take whatever was given to us.
Next, we reach the price target, does that mean that we start selling? If that is the strategy you use, fine. There is another way, let further observe the price action around this target price see if is is losing steam or still have strength. If Mr Market decide to move the price further then we may have a "next price target" or "revise target"; and the whole process repeats.
3. Confluence
From point 2, price target seems not to be very reliable, it keep changing.
One way to gauge the reliability of price target, is see if there is a common price where many of your price projections, using different methods or from different time frames, point to. These prices many not be exactly the same from various projection methods, but they are close together. This price region is called the confluence.
The more price projections landed at the same area, the more reliable the confluence is. Look at it this way, this confluence is the price region where different groups of people using different price projection methods likely to buy/sell.
My posting on United Env Tech dated 1st Oct 2005 is an example:
http://s7.invisionfree.com/ChartistsUnited...dpost&p=2825685HC added on 2005-12-30:
And here is another example on Beauty China:
http://s7.invisionfree.com/ChartistsUnited...dpost&p=3156462 4. Reverse Thinking
To gain more insight, let me prompt you to think in the opposite way.
If you are thinking to SHORT a particular counter, after the price had reached the target of a bullish pattern, do you start shorting immediately the price target is reached? Or do you observe the market action before you act?
Alternatively, if you intend to buy, after the price had fallen to the price target of a bearish pattern, do you start buying immediately the price target is reached without observing what the market action is?