How to Set Profit Targets

by Darrin Donnelly on March 14, 2011

As traders, we’re all looking for that homerun trade, but a lot of singles and doubles can really add up. 

This is where profit targets come in.

I advise all traders to use profit targets.  Especially in a choppier market environment, implementing profit targets allows you take more short-term gains, which make you less susceptible to pullbacks.

The typical use of a profit target means that when you buy into a stock, you cash in on 25% – perhaps even 50% – of your position when the stock reaches a predetermined price target.   There’s nothing like ringing the register by cashing in on profits and by limiting the portion you cash in, you still allow yourself to benefit big if the trade does in fact become a homerun.

However, if it is your preference, you can do very well with the Darvas System by cashing in your entire position whenever a profit target is hit and then waiting for a new breakout before repeating the process. 

This strategy is good for traders who prefer to be a little more active and like selling on the way up as opposed to waiting for a stock to fall before selling.  From a psychological perspective, many traders have trouble selling a stock 10% or so below its previous high, which makes cashing out when a profit target is hit extremely appealing.

How do you set your profit target?

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