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Just like all the activities that an individual does to earn something, trading is no different. Traders trade on various markets to get profit in the end. Though, the hard thing here is when to exit? What is the right time to exit a trade so that you make a profit?
Getting into a trade is easier than exiting it. Exiting a trade requires much more conviction as here you have to make a profit. It results from all the hard work you put in for researching, reading, analyzing, etc. For long term trading, exiting can be easier than day trading; the trades are frequent in day trading, giving less time to think and act.
Day trading targets are predetermined price levels. An investor will exit a trade based on reasonable and objective price levels analysis such as previous support or resistance level, Fibonacci levels, pivot points, etc.
If we take an example, suppose you are trading in a US stock and buy the shares at $10, you want to make a 2 dollar profit, so you set the profit target to be $12. So, $12 is the rate at which you will exit the trade.
There are chances that the stock price may go beyond $12, and in such cases, you may lose the opportunity to make more money. Setting day trading targets come with a few disadvantages, but it definitely proves to be a boon many times.
Why Should You Have a Profit, Target?
The ultimate goal of traders is to profit, but that area is vast and needs to be tamed by deciding the expectations in advance. It provides better rewards with the risk taken. It’s like you are traveling on a bus, so you must know which destination you want to stop the bus and leave.
Just like setting a profit target, setting up a stop loss is essential as well. Stop loss helps in limiting the loss. For example, you want to buy a stock XYZ, now you place the buy order at $15 and want to sell it at $17.5. But what if the price goes down? You would lose money as you don’t know till which rate it will go down, right? So, you put a stop loss at $12.5; if the price goes down beyond this rate, the trading system will automatically sell your stock to save you from further downward risk, limiting your loss only to $2.5.
Day traders don’t take just one trade. They keep on trading in various currency pairs or stocks, out of which some can be profitable, and some would be losing deals. To be a profitable day trader, you have to make sure that your winning deals exceed your losing deals. And that’s when setting a profit target proves useful. It lets you fulfill day trading targets by providing you a risk-reward ratio on all the trades.
What Are the Pros and Cons of Setting Profit Targets?
Every coin has two sides, and so does day trading profit target setting.
The pros of setting profit targets
- Setting a profit target or a stop loss helps determine the risk/reward ratio of trades taken. You can analyze which trades would earn you income and which trades to avoid. Also, setting up a stop loss saves you from the downward risk of the price drop.
- It’s not hard to set profit targets; as a forex day trader, you can easily do so by available data, charts, research, and patterns.
- Setting profit targets help day traders from the unwanted roller-coaster rides of emotions and biases. If the profit target is based on real-time information and objective data, it can prove advantageous in placing a reasonable profit target.
- Reaching a profit target will give a sense of satisfaction to day traders and validate their analysis capabilities. It helps them build healthy trading emotions even if they lose, as they know the risk and rewards involved beforehand.
The cons of setting up profit targets
- Day trading profit targets require sound knowledge and skills as you cannot sway your trade-in any obviate hopes or fears. Doing so would only make you lose profit or would make you lose more money. Ex, if the profit target is too far and hopeful, the rate would not even touch your trading expectation, or if the stop loss is too near the buy price, your trade would get sold faster as a little up and down is normal in day-trading. Thus, you have to be careful while placing a profit target or a stop loss.
- Placing incorrect profit targets or stop loss can prove harmful to your overall trading. You won’t be compensated for risks taken in the end and may lose your trading appetite in the long run.
- You lose the chance of more upward rewards as it’s not needed that your set profit target would be the high of that particular stock or currency. Thus, you miss out on the opportunity to earn beyond your profit target. Though, here you can again trade if the upward pace is still on by taking another trade.
How to calculate the target profit in trading?
Placing a profit target is not less than an art. For making a profit in day trading, a day trader has to ace it through practice. Though, there are a few methods in day trading for when to make profits, as stated below.
- Set fixed reward and risk profit targets
- Set Measured move profit target based on technical analysis
- Set target based on market tendency and price action analysis
1. Set fixed reward and risk profit targets
This is the easiest way to decide when to book profit in day trading. It is a combination of what you expect in reward for the risk you take to set a stop loss. It’s set as multiple of reward: risk; 2:1.
For example, the trader is entering a trade to buy a stock at $15 and wants to sell it at $17. She puts her stop loss at $14 to get a reward: risk ratio of 2:1. The same goes for forex trading. Suppose now the trader wants to buy a currency pair at 2.2560 and places a stop loss at 2.2555. Now, if she wants the reward to risk ratio of 2.5:1, her profit target should be 2.2575.
This method works best if you have a calculated stop loss and profit target. It would ensure that you make more profit while reducing your risk of losing. New day traders should experiment with such methods on a demo account first to avoid the risk of losing money in innovation. A target of 1.5:1 or 2:1 is good to go, but in the end, it depends on the overall expectation of your trade.
2. Set a measured move profit target based on technical analysis
Technical analysis works well for day trading in booking profits. It tells the range at which a stock or pair of currency is trading. Various technical analysis tools like candlestick patterns or chart patterns can prove useful here.
In a chart pattern of an ABC stock, if the price is continuously moving between $40-$45, $5 is the range of move here. You can place your trade accordingly, like buying at $40.10 and selling at $44.50; you can short sell it as well. Technical chart patterns provide a range that a trader can take advantage of with his/her skills.
There are other technical analysis patterns as well, like Triangles or Trade Flag Patterns. It provides a range at the end, and with such measured moves, a trader can forecast price hikes or slumps. There are chances that the price may not be the same as you analyzed, but the meticulous analysis does provide some good outcomes.
You can apply the reward to risk ratio in your trade by combining it with measured moves of technical analysis. For example, if Susan notices that stock ABC is trading between $15-$19, and she places her stop loss at $13.5, she would get a risk: reward ratio of 2:1 if she sells the stock at $18.
In trading, when to make a profit is, as stated earlier is an art, and you can always be creative with art (but here, be extra cautious).
3. Set profit target based on market tendency and price action analysis
This method requires a day trader to do thorough research and spend considerable efforts. But the upside benefits are also great if one can identify the changes in market and price tendencies.
A stock price mainly depends on the overall market tendency, which can further be measured or quantified. Stock prices follow the market trend; if the market goes up, the stock prices will go up and vice versa. Though there are exceptions as well, like the broader market may be going down due to economic scenarios, a company is doing well, and thus, its share price will sky-rocket.
Taking an example here, Susan wants to buy an options contract, and she notices that the particular contract moves 3-4 points upwards every day and comes down 1-2 points before hiking again. Considering that change in price and the day of expiry, she can buy the contract when it is correcting by 1-2 points and can sell it when it goes up by another 3-4 points. It was a particular example, and there are many more market tendencies that a day trader can follow to earn profits.
Coming to the price action analysis, here, support level and resistance level play a crucial role. It can also be called trading in zones as price stays within support and resistance level for a considerable time before breaking the upward or downward trend.
If the ABC stock price is continuously coming down as it touches $19, $19 is the resistance point. Similarly, if the same stock price is going down, but it bounces back each time it touches $12.5, it is called the support level.
A trader can benefit here if he/she notices this pattern and buys near support level and sells near resistance level or short the stock near resistance level and buys it near the support level. You can place your risk: reward ratio around these levels to gain profit.
If the stock price continues to go beyond resistance or support level, it breaks the zone. Now the resistance level becomes a new support level if the price goes up, and if the price goes down, then the support level would be the new resistance level.
For example, as stated above, the ABC stock has support and resistance levels at $12.5 and $19, respectively. If the price goes to $22, $19 will become the new support level. If the price goes down to $10, $12.5 becomes the new resistance level.
Day Trading Targets based on Pivot Points
A day trader can define targets based on the previous day, high, low, and close.
Pivot point = (High + Low + Close) / 3.
Resistance (R1) = (2 x PP) – Low.
Support (S1) = (2 x PP) – High.
Resistance (R2) = PP + (High – Low)
Support (S2) = PP – (High – Low)
Resistance (R3) = High + 2(PP – Low)
Support (S3) = Low – 2(High – PP)
These levels can use for targets based on the current positions.
Day Trading Targets based on Fibonacci levels
Important levels in trading are based on Fibonacci retracement levels such as 23.6%, 38.2%, 61.8%, and 78.6%. This level trader can use between yesterday high and yesterday low, as same as weekly high and weekly low.
The Final Words
Reward to risk ratio is stated as how much risk you are willing to take for the expected reward or return. Based on this ratio, a day trader decides his/her day trading target and stop loss. Though, in the end, it is just an estimation that you put by researching and applying your skills for analysis.
Various strategies, as stated above, help in day trading for when to make a profit. Each of the strategies stated above has its own pro and cons, like the fixed reward to risk strategy is a bit random, but it is easy. The second strategy of measuring moves is based on technical analysis and works best if you master these technicalities, analyze the chart patterns, and trade faster. The last strategy of market tendency and price action analysis can require a day trader to spend long hours of effort to notice and track price moves. It is time-consuming as a day trader has to notice the tendency or price trend for weeks or months to get his/her day trading target right.
As a day trader, you have to get yourself familiar with different strategies sooner or later, as randomness will only fool you. Start with a reward to risk target of 1.5:1 or 2:1; you can increase it with practice and experience of picking out the right stock or currency pairs at the right time. Though, don’t be over-ambitious and greedy, as that only leads to emotional and biased trading, making traders lose their trades and money.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
