Every trade needs an exit point at some stage. Entering a trade is the easy part, but where you exit determines your profit or loss. Trades can be closed based on a specific set of evolving conditions, by placing a trailing stop-loss order, or using a take-profit target. The take-profit is a predetermined price level at which you will close the trade.
Why trade with a take-profit target?
Determining where you will exit before even entering the trade allows you to calculate the risk/reward ratio of the trade. In addition to the importance of the take-profit, the stop-loss defines the potential loss on the trade, while the take-profit defines the potential profit. In fact, the potential profit should be greater than the potential risk.
Advantages and Disadvantages of Take-Profit
There are many benefits to trading with a take-profit target, some of which have been briefly mentioned above, but there are also some drawbacks to using them.
Where should you place the take-profit?
Placing a take-profit target is like a balancing act – you want to extract as much profit as possible based on the market trends you are trading, but you cannot be too greedy; otherwise, the price is unlikely to reach your target. So you don’t want the take-profit target to be too close or too far away.
Fixed Take-Profit: Risk to Reward Ratio
One of the simplest strategies for determining a take-profit target is to use a fixed risk to reward ratio. Based on your entry point, you will need your stop-loss level. This stop-loss will determine the amount you are risking in the trade. The take-profit is set by doubling this amount, for example 2:1.
Trailing Take-Profit
Chart patterns, when they occur, can be used to estimate how far the price may travel once it breaks out of the pattern. For example, if a stock is forming an internal range between $59.25 and $59.50, that is a range of $0.25. If the price moves above $59.50 or below $59.25, another move of $0.25 can be expected (up to $59.75 or down to $59).
Take-Profit Based on Market Trend Analysis and Price Action
Analyzing market trends and price action requires more research and work. The benefit is consistent performance if the trader can correctly identify market trends.
The Final Word on Take-Profit
There are multiple methods that can be used to determine a take-profit target. When using a take-profit, you are estimating how far the price may travel and ensuring that the potential profit outweighs the risk. The fixed risk to reward ratio is an easy way to set a take-profit, but it can be somewhat arbitrary regarding the current price environment or trends within the price action. Estimating movements is a valuable skill to have, as it gives you an estimation of how far prices may move based on the patterns you are currently observing. Market trend research can be very significant, as it can provide immense insight into how financial assets are likely to move. When starting out, a fixed risk to reward method works well. Use a risk to reward ratio of 1.5 or 2:1, and see how it performs. If the price doesn’t reach your target, lower the target slightly (across all your trades). If the price exceeds your targets significantly, increase the target slightly (across all your trades). As you become more experienced, adjust your take-profit based on the other methods presented, if necessary.
Frequently Asked Questions (FAQs)
How do you choose exit targets for swing trading?
Choosing targets for swing trading is essentially the same basic process as choosing targets for day trading. The only differences in swing trading are that the time frames are longer, position sizes may be smaller, and the size of the moves may be greater. Traders can base these targets for swing trading on measured moves, fixed risk to reward targets, or any other type of analysis that also works for day traders.
How…
Can I know my profit in the trade?
To calculate your profit, multiply the price movement by your position size. For example, if the stocks moved by $0.50 in a profitable direction, and you had 100 shares, your total trading profit would be $50.
Your broker should also provide profit/loss information in your open positions list. Remember that, depending on your broker, you may need to toggle settings that automatically calculate wash trade losses.
Source: https://www.thebalancemoney.com/where-to-take-profit-when-day-trading-exit-strategy-4117900
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