What are Profit Targets?
A profit target is a predetermined point at which an investor will exit a trade in a profitable position. Also called take profit levels, they are part of many trading strategies that investors and technical traders use to manage risk. Choosing a profit target is a key factor and just as important as the entry price in your trading strategy. You need to be able to determine a suitable profit target for your trading – one that gives you a realistic profit target, but also gives you a sensible risk to reward.
What are Profit Targets?
Establishing a set position on where to get out before even entering a trade and calculating the ratio of profits compared to the stop-loss is called the risk/reward ratio. Polar opposite of a profit target, the stop-loss determines the potential loss on a trade. In an ideal situation, the reward potential should greatly outweigh the risk at a factor of 1:4 (risk to reward).
While we can never be too sure of which trades will be the clear winners and which will be the big losers before we take them, we are more likely to see an overall profit if our risk/reward ratio is proper over the span of a large amount of trades. By trading with a profit target, it is possible to assess whether a trade is worth taking or not. In this sense, establishing a profit target actually benefits the trader to help filter out bad trades. If the potential profit doesn’t outweigh the risk, avoid taking the trade at all costs. In this next section, we’re going to take a look at Stellar Lumens (XLM) and identify our profit target levels.
Example of Profit Targets
Taking a look at the weekly time frame of Stellar Lumens (XLM), a top market cap cryptocurrency currently ranked #22, we already identified some major levels of support & resistance as well as a significant zone of accumulation & distribution. If you haven’t seen my posts on either of those technical analysis basics lessons, I highly suggest checking those out then circling back to this article. Anyways, on this chart of XLM there seems to be 4 major Take Profit (TP) levels marked out along well-known levels of resistance.
The 1st TP level, TP1, placed at 0.18423 is a resistance level found on the daily time frame beyond the scope of this chart. However, TP2 placed at 0.20721 is found at the swing low after the rejection from the distribution zone around the TP3-4 levels. Both the TP1&2 levels are well-known levels of resistance that were 1st touch rejected and sent the price of XLM back down to the bottom support of the accumulation area around 0.14158. From here, XLM bounced off this bottom level of support and in one candle actually wicked all 4 TP levels. TP3&4 are respectively the top & bottom levels of resistance inside of this distribution area found on XLM’s weekly time frame. Shortly after wicking all 4 TP levels, Stellar rejected off of TP4 and for the next two consecutive candles, closed right below that level.
TP1 🎯 $0.14158
TP2 🎯 $0.16247
TP3 🎯 $0.27767
TP4 🎯 $0.30406
How to Identify Levels to Take Profit
Take profit levels (TP) are identified along well-known levels of resistance. On an uptrend, take profit levels go hand in hand with zones of distribution and resistance levels. By identifying either a resistance level or a zone of distribution, traders can get a good sense of where to take profits and what price the market is going to pullback to.