Pros and Cons of Profit Targets

Every trade requires an exit point. Getting into a trade is the easy part, but where you get out determines the profit or loss. Trades can be closed based on a specific set of conditions developing, a trailing stop loss order or with the use of profit target.

Pros and Cons of Profit Targets

There are many various benefits to trading with a profit target. But there are also some Pros and Cons to using them.

The Positive Aspects of Using Profit Targets

By placing the stop loss and a profit target, the risk/reward of the trade is known before the trade is even placed. You make X or lose Y, and based on the information you can decide if you want to take the trade.

The Profit targets can be based on objective data, such as common tendencies on a price chart.

A Profit targets, if based on the reasonable and objective analysis, can help to eliminate some of the emotion in trading as the trader knows that their profit target is in the right place based on the chart they are analyzing.

If the profit target is reached, the trader capitalized on a move they forecasted and have a reasonable profit on the trade. Assuming the trader is happy with the risk/reward of the trade before taking it, they should be satisfied with the result regardless of whether they win or lose. In either case, they took the trade because of their more upside potential than downside risk.

The Negative Aspects of Using Profit Targets

Placing profit targets requires skill; they should not be randomly placed based on hope or fear.

Profit targets may not be reached. The price may move to the profit target but then reverse course, hitting the stop loss instead. As mentioned, placing the profit targets requires skill. If profit targets are routinely placed too far away, then you likely won't win many of trades. If they are placed too close, you won't be compensated for the risk you are taking.

A Profit targets may be greatly excelled. When the profit target is placed, further profit is sacrificed. If you buy a stock at $6.60 and place a profit target at $6.70, you give up all profit above $6.70. Remember though, and you can always get back in and take another trade if the price continues to move in the direction you expect.

Traders should always know that why and how and they will get out of a trade. Whether a trader uses the profit target to do this is a personal choice.