Pros and Cons of Profit Targets

By Jessica Barnes | Posts

Dec 29

See this to know the benefits of trading using profit targets. However, there are some not so good points about trading with a profit target.

Pros

  • When you place a stop loss and a profit on the trade then you know the risk: reward ratio. This is known before you even place the trade. You can then decide whether you want to take the trade or not.
  • The profit target is based on data and logical reasoning and what the trader sees on the charts.
  • When a profit target is placed as soon as one enters the trade, it helps to keep emotions aside. There is no scope for any guesswork and the trader uses his analysis to decide what could be a good profit level
  • If the profit level gets reached then the trader would have capitalized a good amount of gain.

Cons

  • The profit should be placed not on mere guesswork. It should not be placed randomly. Too much hope can let the trader place the profit target very far away. Fear can push him to place the target very close to the entry level.
  • Placing the profit target requires a lot of skill. There can be a condition where the price may move closer to the target price but not touch it and then reverse the course and hit the stop loss instead. This is especially true if the profit is placed at a huge distance. If this happens regularly then you may be losing out on most of your trades even after the analysis being right.
  • The profit target does not let you take the benefit of the full So once you are out of the trade you cannot benefit if the price tends to move further up.
  • Every trade should have an exit price. Entering the trade is the easy part, what is difficult is to determine where to get out of the trade. This is what will determine whether the trade would be profitable or a loss-making

 

Ways by which the trader may determine the target level

The target should be placed such that the risk to reward is met. The stop loss is as important as setting the target level. The stop loss will determine what the loss of the trade is and the profit level will determine what the profit on the trade is. The reward should always be higher than the risk of every trade.

It is impossible to determine beforehand which trade will be a success and which one a loss. Thus if the reward: risk ratio is taken care of then there is a high probability that with more number of trades the trading account may be in a positive.

 

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