What is 'Profit Target'

A profit target is a predetermined point at which an investor will exit a trade in a profitable position. Profit targets are part of many trading strategies that investors and technical traders use to manage risk.

BREAKING DOWN 'Profit Target'

Profit targets can be determined at various points of an investment. Investors can initiate conditional orders to achieve their profit target. Some trading strategies integrate a profit target with an initial order. In other cases an investor might use a conditional order to set a profit target after identifying certain forward looking projections.

Profit targets can be a good way to manage the risk of high risk investments. Often, high risk investments require regular due diligence. Thus, identifying and following a profit target strategy can help an investor to cash in on profits and mitigate any potential for losses.

Covered Strategies

Many covered investment strategies use two legged positions which integrate a planned entrance and exit strategy for an investment with a specified level of profit. Covered strategies are commonly used when futures and options trading is involved. There are several scenarios where an investor can enter into an investment position with a guaranteed profit target. A calendar spread futures trade is one example. In this trade, an investor seeks to identify a commodity selling at a lower price than its corresponding futures contract at some time in the future. Entering into both the long position and the short futures contract position provides for a guaranteed profit that can be seen as a profit target.

Trading strategies can also include bracketed conditional orders that can provide an investor with a profit target as well as maximum loss constraint. A bracketed buy order is one example of this type of trade. In a bracketed buy order, an investor places a conditional order to buy at a specified price. Along with the order they also place a stop loss condition as well as a profit limit condition. After buying the security, the stop loss and profit constraint provide for an integrated profit target and maximum loss.

Conditional Orders

In a more simplified approach to profit target investing, an investor may choose to use a standard profit limit order to manage towards a specified profit target. A profit limit order is a sell order usually programmed as a good until canceled order. This conditional order is scheduled to sell a security at a price higher than its current trading price. Investors may use this type of order when investing in a cyclical security. Many traders may also choose to set conditional profit limit orders at a stock’s peak resistance level.

The opposite of a profit target is a stop loss. A stop loss order sets a price point at which an investor exits a trade that has experienced a predetermined level of loss in order to avoid losing even more.

RELATED TERMS
  1. Exit Point

    An exit point is the price at which an investor sells an investment. ...
  2. Bracketed Buy Order

    Bracketed buy order refers to a buy order that has a sell limit ...
  3. Stop Order

    A stop order is an order to buy or sell a security when its price ...
  4. Trading Plan

    A trading plan is a systematic method for identifying and trading ...
  5. End of Day Order

    An end of day order is a buy or sell order requested by an investor ...
  6. Fill

    A fill is the action of completing or satisfying an order for ...
Related Articles
  1. Investing

    Day Trading Strategies for Beginners

    This day trading tutorial covers general principles, deciding when to buy and sell, common day trading strategies and how to limit losses.
  2. Trading

    Why limit orders may cost more than market orders

    Learn the difference between a market order and a limit order, and why a trader placing a limit order sometimes pays higher fees than a trader placing a market order.
  3. Investing

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
  4. Investing

    Understanding Market Orders And Limit Orders

    A market order executes a transaction as quickly as possible at the present price. Immediacy is the main concern. A limit order is executed at or below a purchase or sale price. Price is the ...
  5. Investing

    Exit strategies: A key look

    Find out strategies for setting appropriate exit points when trading to help you avoid taking premature profits or running investment losses.
RELATED FAQS
  1. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
  2. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
  3. What is the difference between a buy limit and a sell stop order?

    Understand the differences between the two order types, a buy limit order and a sell stop order, and the purposes each one ... Read Answer >>
Trading Center