The other way to protect open equity profit is to take profits when a predetermined price level or profit threshold has been reached. There are many ways to calculate such profit target thresholds. Profit target orders are set with price or better or price limit orders.
Definition: A profit target is an unconditional exit of a trade with a locked-in profit at some predetermined price or profit level. The incorporation of a profit target into a trading system is a more proactive and aggressive method of profit management. The most positive aspect of a profit target is that once the desired profit is realized, it is captured immediately. It therefore cannot be lost like it can be with a trailing stop. The negative aspect occurs when a profit is taken and the market continues to move well beyond this target level. These potential additional gains are lost because our profit target has closed out the position.
There are trade-offs with the use of profit targets. Some traders cannot live without them just as some cannot live with them. Trading systems that use profit targets, in contrast to those that do not, can be less profitable overall but can produce a higher percentage of winning trades and a smoother equity curve. Sometimes profit targets reduce per trade, and total risk and overall performance can be more stable.
Not all systems are improved by th euse of profit targets.Whether profit targets are beneficial or not very much depends on the style and pace of the trading strategy. In general, active, countertrend trading strategies that trade from overbought and oversold conditions benefit the most from profit target orders. Conversely, slower, trend-following trading strategies generally benefit the least from profit targets. |
| Profit Target |
Profit target
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