Determine a Profit Target

Trading futures can be an exciting and lucrative way to maximise the returns from your investment capital. A highly leveraged, margin traded instruments, futures hold the potential to significant profits, but the longer you hold open your exposure to a market, the greater the chance of the market turning and eating in to your profits. As a result, it pays to build in to your strategy an exit point, or at least to know trade by trade the levels at which you’ll pull out on the positive and negative side. Establishing a profit target for each individual transaction is a worthwhile task, even as a percentage gain, so that you can better determine when to exit and when to move on to the next trade.

Why Set A Target?

One of the real benefits of trading futures is that they bring the capacity for unlimited earnings on the upside, and are usually traded on margin through highly leveraged transactions. As a result, it can understandably seem like you’re the wet blanket at the party when you think about targets and limiting your returns. But setting a target for your desired earnings level is an important part of commanding your trading destiny, and by knowing the minimum amount of target earnings from each trade you can start to build objectives in to your trade-by-trade decision-making.

There’s nothing that says you have exit once you’ve reached your profit target. In fact, you could even account for the cost of a guaranteed stop in your profit expectations, position that underneath your target earnings level and carry on risk free until the market reverses. But by setting up a target from the outside and having a particular figure to work towards, you make sure that every position you trade is at least pulling its weight proportionate to the rest of your capital. This will give you more control over your portfolio, while making it much easier to keep a running balance of winning and losing trades.

Calculating Your Profit Target

Once you’re set on the value of having earnings targets forming part of your trading plan and your daily market decisions, you need to then think about what your magic number will be. The best way to compute profit targets is as a percentage. This allows you to make comparisons between transactions of different sizes to determine how effectively each performed on an equal, unweighted basis. Establishing this percentage level per transaction depends on a number of variable related to your trading account and expectations, and you should be careful to price each of these in when calculating your take from every trade.

Initially, you should work out how much of a percentage return you want to make per year. Remember to factor in capital you will hold in reserve – you might only trade, say 20% of your capital at any one time, so you want to make sure your returns on the 20% give a satisfactory return over time on the full 100% of your allocated capital.

Once you’ve worked out an annual yield, say 100% for simplicity, you then reverse engineer your profit target to a per-transaction level. This will indicate the degree of gain you should be expecting from each transaction you make, and will give you the key data you need to plan and forecast your trading performance. You should also take some time to play around with these numbers – information like the effect of varying degrees of loss on one or more of your trades, for example, might be critical in ensuring you hit your ongoing earnings targets.

Setting a profit target before you stake your capital in a futures trade is a wise move as far as establishing your expectations is concerned. As a means of keeping your trading in check and ensuring you’re sticking to a broader, logical plan, establishing the minimum profit take percentage for each trade is an essential process in formulating your trading style and determining your overall trading success.

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