Every trader should have a risk management plan in place before they start trading. Setting a profit target is a simple risk management tool that every trader should incorporate. There are several ways to implement profit targets into your daily trading. Depending on your goals and trading plan, not all profit targets will be the right one. Here we look at several ways to set profit targets so you can figure out which one is right for you.
Profit targets are a risk management method that many traders use. While setting profit targets can be a more conservative risk management method, many traders enjoy using profit targets because they are easy to implement, and they help a trader to remain disciplined in their trading. There are several ways to set profit targets and incorporate them into your daily trading.
Possibly the simplest way to set profit targets is to set a dollar amount. A trader would set a profit target as a dollar amount and incorporate this amount into their trading strategy. Let's say we are trading the E-mini S&P 500, and we decide to set a $150 profit target for ourselves. Since one point is worth $50, we would get out of the market once we had had three winning trades in a row, or once our trading profits (with losses and wins taken into consideration) had reached $150. This profit target helps us get out of the market with a conservative profit, and makes sure we do not expose ourselves to unnecessary risk or potentially giving back profits.
Traders can also set profit targets by using a percentage price. Setting a percent price, however, also means that you would need to set a stop loss. If you are unfamiliar with stop losses, this method might not be the best for you. A swing trader who sets a percentage price might set their stop loss at 2% and their profit target at 3% of price. This means that the trader would exit the market if their loss was reached and exit the market if their profit target was reached. Setting profit targets this way is beneficial because it helps the trader to know when to close a position so that it does not go against them if they hang onto it for too long.
Profit targets can also be set based on support and resistance in a market. If you were to see the market moving up and you expected to encounter resistance in a certain area, you could set your profit target just below the resistance. This method would allow you to take profits out of the market as the market moved up to resistance.
A trader could also implement a trailing stop to set their profit target. This method has become very popular with many traders. A trailing stop adjusts based on moves in the market. A trader adjusts the stop loss with the trailing market in order to allow a stop to move higher when the market is moving up, and lower when the market is moving down. This approach allows a trader to lock in profits once that trailing stop is hit.
Profit targets are a great way to manage your risk in trading. Many traders feel that if they set a profit target they will be missing out on potential profits or opportunities. In some cases, perhaps this could be the result of setting a profit target. However, more often than not a profit target will save a trader from staying in a market too long and losing profits they had already accumulated. I highly recommend profit targets to any trader who is serious about making money with trading.
Markus Heitkoetter is the author of the internation bestseller "The Complete Guide To Day trading (www.rockwelltrading.com) and a professional day trading coach. For more free information on day trading visit his website www.rockwelltrading.com.