Per Trade Profit Target - Introduction
When a trader first starts out in their day trading activities, they will usually start out with little or no idea of their trading style. The trader will enter the market with no fear and will achieve moderate success. Then the unthinkable happens. The trader is slapped with their first major hit. This setback will discourage the trader and will ultimately force them into analytical mode to figure out why they took such a hit. This cycle of small wins, small losses, and more analysis will go on until the trader is either out of money, or comes up with sound money management techniques. There are some traders who simply trade the charts and do not focus on the money. The choice to trade the charts exclusively, or to include money management in your trading techniques is totally up to you.
Set a Per Trade Profit Target or Trade the Charts?
If you are wondering if you should trade the charts or set a per trade profit target, answer the following questions:
The first step in setting a per trade profit target is to analyze your last three months of day trading activities. Next, observe the maximum profit you would have made per trade with the highest frequency. For my personal day trading activities, I began to notice that my trades generally went in my direction two percent of the time on 2/3 of my trades. You will have to be honest with yourself throughout this process. Remember, the key is not setting some arbitrary profit target, but one that fits your trading style and risk profile.
Executing the Trades
So far we have only discussed the profit target, the flip side to this is that you will have to set a stop limit order as well. There is a general rule in the market that you should set a 3-to-1 profit to risk ratio; however, if you notice that your trades require more room for you to hit your profit target, give them the space they need. The first challenge you will face in this new day trading style, is to actually let the trades play out. As you approach your per trade profit target, you will feel the urge to close the trade out early. You must fight this emotion and let the trade play out. After the first month of this new approach, take a look at your trade log and compare it against your previous three months of trading activity. If you see that your results are not improving, you will have to adjust your per trade profit target.
Summary
Day trading can be a complicated or simple exercise. By reducing trading to a per trade profit target, you are in essence taking the ambiguity out of trading. Remember, the goal in trading is to make money.
See You At the Top,
mysmp.com
How to Set Your Per Trade Profit Target