We hear quite a bit about price targets during earnings season. A company has a good report, so analysts plug the numbers into a spreadsheet and come up with a new price target. Holders of the stock love it and keep buying, and analysts receive the attention they crave.
It can be quite lucrative trading analyst price targets, so it is interesting to consider the psychology that surrounds them. Price targets are changed constantly because stocks are dynamic and not static. What makes sense one day will be irrelevant the next as facts and market conditions change. A sudden large increase in a price target will lead market players to believe that there has been a significant change in a company's business. Sometimes that is true, and the price target increase will be the start of a major run.
Many market players like price targets because they remove the decision-making process from the trading process. You simply buy a stock and then wait for it to hit its price target. You don't have to bother with charts, fundamentals or anything else.
Of course, this assumes that nothing ever changes. In reality, conditions change every day, so shouldn't your price target be adjusted every day as new facts emerge?
For many traders, price targets are a psychological crutch that helps them not overtrade a stock. They believe that a stock is going much higher, so they come up with a high price target and that helps them stay with a trade when the market is weak or a stock is consolidating. That can be very helpful dealing with normal market ups and downs, but it can be quite harmful when there has been a change in conditions and the initial assumptions are no longer valid.
Technical traders often look at charts and try to project price targets by extrapolation. The typical logic is that since a stock ran up 10 points during the last big move it will move up another 10 points the next time it moves. I've never seen any proof that this sort of extrapolation actually works but it can be quite helpful in keeping a momentum trader in a stock that they like.
Price targets are more about controlling your behavior and impulses than they are about actually coming up with the ultimate price that a stock will reach. In almost all cases when a stock hits a price target, the analyst or trader will simply increase it. Price targets are mostly just a remainder that stocks don't necessarily go straight up. Even the best stocks will pull back and consolidate, and we sometimes need to keep in mind that weak price action doesn't necessarily mean that conditions have changed.
Targets are almost never accurate, but they don't have to be of no value. We all need to remember, especially in a market like this one, that sometimes you need to have faith and be a little forgiving when your favorite stocks aren't doing what you'd like them to do.