Once you enter a trade, you’ll have to leave—exit—at one point or another. A profit target is one tool that could help you a lot when deciding the best time to exit a trade.
What’s a Profit Target?
As gathered from various expert reviews like like HQ Broker Review and FXempire Forex Review, profit target is the price level where you want to close the trade. For example, you bought a stock at $10.00 and your target earning is $10.50. What you will do is place an order at $10.50. If the price hits that level, the trade will close automatically.
You should know that just like any other tools and orders, profit target orders have their shortcomings and disadvantages.
The benefits that you can get if you use profit targets include a lot of things.
First, when you place a stop loss and profit target, you already know the risk/reward of the trade even before you place that trade. Using that information, you can decide whether to take the trade or not.
Second, profit target can be entirely based on relevant, objective data. Such data include price chart tendencies.
Third, if you place the profit target based on objective analysis, it will certainly help alleviate some of the unwanted and disturbing emotions in trading. This is because you already know that your profit target is in a good place, backed by the data on the chart you are analyzing.
Lastly, if the profit target has already been reached, you can build up on the move you have already predicted. You also will have had a reasonable profit on the trade. Let’s say that you have been satisfied with the trade’s risk/reward ratio even before taking it, you would also be satisfied even if you lost the trade. This is because whatever happens, you know that there has been more upside than potential risks.
Now, as indicated above, you should also be wary of the following downsides.
First, placing profit targets can be extra tricky. The biggest mistake you could do is to place them randomly. If you let your emotions control you, you will either place it too far away because of hope or too close because of fear. If they’re placed far away, you can’t win many trades. If they’re placed too near, the risks you’re taking won’t be worth it.
Second, your profit target might not be reached. There’s always the chance that the price will move toward the target and then turnaround. It can continue further down and hit the stop loss instead of the profit target.
Lastly, prices can greatly exceed profit targets. Once you place a profit target, any more profit above the target will be forfeited. For instance, you buy a stock for $10 and your profit target is $10.50. Any amount of profit above $10.50 will not be given to you. You can just try to exit and then get back in to take another trade—if you think the price will continue to move in the direction you want.
Remember that everything in trading requires patience. And you will definitely need a lot of patience when trying to master the proper usage of profit targets, as well as other orders like stop loss and trailing stops. Remember that whichever tool you use, you first have to thoroughly understand the way they work.