The benefits of using a profit target
A profit target can help you stick to your financial goals whatever they are. Whether you’re dealing in stocks, real estate or sales, it’s good to have a target, and even better to stick to it.
Fortunately for financial traders, you can use limit orders to close a trade at your target level and protect your profits.
Let’s say you place a spread bet in the belief that a stock valued at £10 per share will increase in value. You can monitor your trade and close the position once you’re satisfied by the profit, or use a profit target to instantly close your position once the stock hits a predetermined value.
If you choose to set the profit target at £11, for example, the trade will automatically close as soon as that value is reached.
Profit targets can be set as aggressively or conservatively as you want depending on whether you’re looking for significant profit before closing, or smaller returns.
Why set a profit target?
Though a profit target will always limit the potential profit of a trade, it also provides security. Specifically, a profit target ensures that you don’t hold a position for too long, only to see your running profit wiped out before you close your trade.
Traders can often struggle to handle positions that perform exceptionally well. Sure, there are worse problems to have – but it can be difficult to close a trade that is steadily increasing in value, while showing no signs of slowing down. The gambler’s adage: ‘never quit while on a winning streak’ is a tempting philosophy to follow.
But markets don’t move unilaterally. They fluctuate, and gains can be lost every bit as quickly as they’re made. As every experienced trader knows, you haven’t made a profit until your trade is closed. And that’s why many experienced traders use profit targets.
How high should I set my profit target?
Are you confident the market is going to move dramatically? Are you confident in the direction it’s going to move? Are you willing to risk losses in pursuit of a big gain? These are questions that will help you determine your profit target.
No answer is right for every trader, nor is there one rule that every trade can make. To determine the right target, read the term ‘profit target’ literally. What’s your target?
If the research you’ve conducted shows a big movement is likely, then you may choose to be aggressive. If a market is trading in a narrow range, or you’re concerned about making a loss, then you could choose to be conservative.
These allow you to close a position automatically when it hits a certain price, thus preventing you from suffering further losses.
Stop-loss orders can similarly be applied aggressively or conservatively. If you’re confident the market is moving in the direction of your trade, be sure not to set a stop too close to the original price, or any adverse move could end the trade quickly before you reach your profit target.
On the other hand, if you’re worried about the potential downside of your position, it’s wise not to set your stop-loss too wide.
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.