The success or failure of your trading truly comes down to this. There are a few other things that are equally as important as assessing reasonable profit targets (position sizing is one of them). If you aren’t taking profits, you aren’t making money.

A lot of people, especially newer traders, like to hang on to an open trade that’s winning, because they think the trade will just keep gaining and gaining. They’re afraid to get out of the trade and book their profits, for fear that they might miss the extra gains.

Your Account Is All That Matters

I’d like to share a little piece of perspective with you. Can I do that? Thanks. Here it is: you are trading your account– not the market.

To be clear here, I’m talking about missing trades or not getting the whole trade. Allow me to explain what I mean. What ultimately matters in trading is making money. Yes, or yes? Yes. Each time you take a trade, you are exposing yourself to a possible loss in your account. In other words, you’re risking your money to make money. Basic stuff.

What often happens though, is that traders feel the need to capture price movement in the market by way of squeezing every dollar out of it (i.e. being greedy), rather than minimizing their risk while growing their account. If the market moves 5 points and you capture 2 points, consider that a win because your account just went up.

You will occasionally have those massive winners where you’re on the right side of the trade and the market shows no signs of slowing down. However, most of the time you’re account is going to grow faster, and without as much volatility in your equity curve, if you identify reasonable profit targets that have high odds of getting hit.

There is no point in being upset that you only made $200 when you could have made $500 on a trade. That is a win. It’s when you start getting upset, and getting greedy, then you really screw yourself over. That’s when you hold on to winning trades for so long (thinking they’re going up forever) only to have them reverse on you and turn into losers.

If you’re upset about making $200 instead of $500 on a trade, I would recommend that you go make $200 by working a job that pays you minimum wage. Then come back here and quit your bitchin’.

How Do You Identify Reasonable Profit Targets?

Trading is about assessing the odds and probabilities of something occurring. It’s not about being 100% certain, but rather being more or less certain. See the difference?

When thinking of profit targets, you need to consider the odds of your target getting hit. If a Stock has an expected daily range of $2, don’t expect to make $5 on a day trade.

You might be thinking to yourself, “Expected range? What’s that?”. Great question. Thanks for asking. The expected range is a useful concept that is used in the Options Market, but can just as easily be applied to trading outright Stock and Futures. There’s a few things you need to understand when it comes to Options and expected range when considering reasonable profit targets.

The Distribution Curve

Every Stock, Option, and Future trades within a range. It doesn’t matter if price is trending or rotating, it all trades within a range. Even a trending market doesn’t go up forever. When talking about the Distribution Curve and ranges, you should also understand Standard Deviation.

Standard Deviation is the probability of something occurring within a range of data. Anything that is within 1 Standard Deviation has a 68% chance of occurring within that range. Anything within 2 Standard Deviations has a ~95% chance of occurring within that range. Anything within 3 Standard Deviations has a ~99% chance of occurring within that range.

By understanding Options, we can calculate exactly what the 1 Standard Deviation move of an underlying will be. In other words, with the E-Mini S&P 500 Futures (/ES) trading at around 2630, with an Implied Volatility of about 11%, I know that the expected 1 Standard Deviation move of the /ES is roughly 18 points.

Therefore, I know that my profit targets should be under 18 points if I’m trading intraday. This also tells me that the smaller my profit targets, the higher the odds that they get hit. Conversely, it tells me that larger profit targets have a very low probability of getting hit during my timeframe.

***Moreover, this information can be used to time entry points. If an underlying has a tendency to stay within its 1 Standard Deviation range 68% of the time, it’s possible to fade the extremes of the expected range with decent odds of the underlying reverting back to its mean.

Implied Volatility

We talked about Implied Volatility in the last section on the Distribution Curve, and I think it’s a good idea to clarify what it is exactly. The Implied Volatility is the measurement of the future volatility in an underlying. It’s used by market makers to assess how much an underlying is likely to move over a given period of time (typically 1 year, but could be shorter).

Typically, the actual volatility that occurs is less than the Implied Volatility. Implied Volatility is just an estimate, but it is very useful because it allows us to anchor our expectations to something.

Probability And Price Extremes

So if we know the expected move of a Stock or Future (underlying) we can accurately estimate the probability of our target getting filled. Also, just to reiterate, we can use the information that the Implied Volatility gives us to estimate temporary price extremes from which we can initiate trades.

This is great because the most amount of trading activity tends to happen around these price extremes, and it’s possible for us to take advantage of good trade location (i.e. asymmetric risk:reward). More importantly, knowing the expected range can help to identify where not to get it. If we are trying to follow the trend at a price extreme (rather than fade the move), the odds of price continuing are low.

In other words, if a Stock is moving upward and it’s already moved 1 Standard Deviation, to buy into that Stock at that high of a price would be a trade that has a low probability of success, because we know that there’s a 68% chance that that’s the top of the range.

Now What?

In summary, reasonable profit targets are anything that are within the expected move (range). You’re probably thinking to yourself that using the expected range to assess profit targets is all well and dandy, but how can you personally measure this? You’re in luck. If you use Thinkorswim (it’s free to sign up and use– no data fees), we have a pretty useful tool for you. It’s our Range Predictor Tool. It takes the volatility of the underlying, and displays on your trading screen– well, actually if you click the link you can read all about it.

Anyhow, I hope this article was useful to you in more ways than one. If it was, please let us know in the comments below. Thanks for reading.