If you asked any trader what one of the most enjoyable parts of trading is, it’s probably seeing an executed position hitting a profit target. Yet, don’t let this seemingly easy part of forex deceive you because some hard work and luck are involved in ensuring maximum gains.
This concept applies even in using forex signals. Setting profit targets should align with a favorable risk to reward. It’s not just about taking profits but trying to take profits that are consistently greater than your losses over time.
This article will explain the various ways of setting profit targets in forex signals.
The importance of profit targets in forex signals
The main appeal of forex signals for anyone subscribed to them is much of the behind-the-scenes analytical work has already been done by the signal provider. All that’s usually needed is following the signal and entering according to the prescribed entry and stop loss prices.
Yet, even for the inexperienced, one should understand profit targets, specifically as they relate to the risk-to-reward (RR). This ratio refers to the relationship between the potential profit and the maximum loss in every position.
Typically, most traders use a ratio like 2:1, meaning they aim for gains at least twice the size of their losses. The idea is, over time, the profits will compensate for the unavoidable losses to reach a decent net positive return.
Yet, you may receive signals with a negative RR, where the stop loss is noticeably larger than the take-profit target.
Unless the signal provider provides a clear, low-risk way to maximize the profit (e.g., scaling in) or explains the technical reason behind this decision, you should question this anomaly.
Of course, RR ratios are hardly ever set in stone because of the market’s dynamic nature. However, any signal subscriber should educate themselves on the concept and understand why it’s the foundation for profitably growing one’s trading account.
The common methods of taking profits with forex signals
Let’s now consider some popular techniques for profit targets with forex signals.
Fixed profit targets
Here, the signal subscriber will set a defined profit level as prescribed by their signal provider without any intervention. The main advantage is no other work is required once you’ve opened the position.
However, this approach is rather rigid as one will find situations where they have some notable ‘open’ profit. At this point, the market might not go to the target in the desired time and perhaps even reverse close to or beyond the entry level.
Therefore, the fixed approach can net signal subscribers with profits but lacks flexibility. This reinforces the need to have some forex education if you’re a beginner.
Trailing stop profit targets
A trailing stop is a type of stop order designed to automatically lock in profits after price moves a defined number of pips. So, when the market makes a new high or low, the stop would ‘trail itself’ a certain distance without any meddling from the trader.
Generally, you’ll want to avoid using these under normal conditions as such orders are known to trail too closely to price. Automatic trailing stops could work in fast-moving markets.
Instead, traders will employ various techniques (covered in the next sections) to move the stop manually once they’re in a profitable position.
Support and resistance levels
Support and resistance form the core of virtually any trading strategy. The theory is when the market is trending down and you set your profit target at a support level as the price will probably struggle to break this point.
Conversely, when the market is trending up, one sets the profit target at a resistance level since the price may likely struggle to breach this area.
In some instances, one may be lucky in catching a ‘runaway’ trade where price forcefully breaks a support or resistance, resulting in several hundred or thousand more in pips than expected.
Regardless, signal subscribers or traders can be pretty flexible with this approach. However, one needs to know which is the likely support or resistance based on time frame reference.
Moreover, you should know the most logical place to trail your stop, an area allowing you to remain in the trade for long enough while not being too close to the price.
Time-based profit targets
This approach is quite discretionary in that signal subscribers simply let their trades run for an indefinite period. Yet, one might decide to exit based on a number of things.
For instance, a day trader may close their positions right before the trading day or a swing trader at the end of Friday. Someone who received a signal during a news release might exit at the close of a 15 or 30-minute candle.
Pattern-based profit targets
Specific price action patterns have pre-defined targets which traders believe to be suitable. For instance, let’s assume your signal provider offered a signal based on a head-and-shoulders formation.
The rule of thumb is setting your profit target by using the distance between the ‘head’ and the ‘neckline’ as a reference. Other patterns like double tops/bottoms, wedges, cup and handle formations, harmonics, etc., tend to have their predetermined targets as well.
Final word
Ultimately, receiving signals doesn’t have to be ‘set and forget.’ With some knowledge of the markets, you can customize your profit targets which usually isn’t possible with something like a robot.
Overall, how you exit a position is as important as your entry. Most people treat the two in the same manner. Yet, analysts don’t have the selection criteria when choosing an entry and an exit.
While signals are trading recommendations, you should have a general understanding and skill set of forex, particularly with risk and money management. A plethora of methods exist for profit targets. Therefore, it can take time and experience to find the most compatible option.
