Have you ever noticed how often you bargain for things you want to buy while travelling abroad, even if the price is already far less than what you would expect to pay in your own country? Because you’re just trying to get the price you think is best for what you’re purchasing! Well, in trading you should be thinking similarly – just because you regularly make money from your established take-profit level, are you extracting the maximum amount from every trade? Is my stop-loss too close to my entry point? How is my take-profit in regards to my stop-loss? Let’s discuss about how to set your take-profit.
FOREX Strategy: How to set your take-profit
Importance of money management rules and trading plan
Before opening a position, you should always have a clear view of your money management parameters – meaning stop-loss and take-profit levels.
Risk management, or money management, is a core concept when learning about trading to preserve your capital. There are several underlying concepts to understand and number of tools you can use for that, but let’s focus on the risk/reward ratio.
This ratio describes how much capital you’re willing to risk in order to make a potential win. In other words, it measures the amount of profit you can expect in comparison to the amount of risk you’re willing to take for any trade you open.
The distance between your stop-loss and your take-profit from your entry level will help you calculate this risk/reward ratio. A good starting point is to aim for one of at least 1:2.
In relation to your trading profile, you should determine your money management parameters and that must be part of your trading plan. You may sometimes be tempted to take positions without following your trading plan, but resist the urge! As we said in a previous article, you should always follow your trading plan and apply sound money management.
To help you think more thoroughly about your trading plan, read:
TOP 5 REASONS TO WRITE A FOREX TRADING JOURNAL
Never guess your take-profit level!
Before you open a trade, it’s very important to know where you think the trade is going: you should then have a pre-determined entry, stop-loss and take-profit level in mind.
Choosing a profit level is a key aspect of your trading strategy, so you need to have thought about it beforehand. You need to determine a suitable profit target according to your position – as you should always get the full amount of profit you’re entitled to.
There are number of ways that you can determine your profit target, from technical and mathematical indicators to chart patterns. Using support and resistance levels is one of the easier and more powerful tools.
Support and resistance levels are excellent tools you should always take into account in your trading to visualize key levels on a chart where the price may start rising or falling. Investopedia defines a support as the following: “support level refers to the price level below which, historically, an asset has had difficulty falling. It is the level at which buyers tend to enter the market”. A resistance level has the opposite definition of a support level.
What to remember?
• profit target is the price level that you set in order to take your profit
• determining your take-profit level is a key part of your trading strategy
• never invest without following your trading plan and money management parameters
• in order to choose where to set your take-profit, you need to think in advance exactly how much risk you are ready to take
• support/resistance levels are the most popular chart pattern used by investors to set-up take-profit levels
• if you’re long: your take-profit should be placed around a key resistance zone
• if you’re short, your take-profit should be placed around a key support zone
• be sure your trading strategy is as robust as possible to take as much profit as you should
• do not forget that even though a certain trading strategy might work now, it won’t be profitable forever, so adjust your parameters when needed.