Profit Target Explained: Should You Use It In Your Trading Strategy?

Should you use profit target in your trading strategy? Many traders use various forms of stops in their trading. One of them is the profit target. A profit target is exactly what the name says: a pre-set price where the trader takes profits and exits the trade/position. Many traders use a profit target, but that does not mean it’s a rational target to use.

Our conclusion is pretty straightforward: Most of the time you should not use a profit target because we find very little empirical research that justifies a profit target. As a matter of fact, we believe they complicate trading strategies and make them more prone to curve fitting. Thus, be very careful of using profit targets in your trading strategy. We prefer to exit by using one or two parameters or a time stop.

In this article, we provide examples of how the profit target changes the overall result of a trading strategy. Even if a profit target improves the strategy, it doesn’t mean you should use one. We explain why in the examples we provide.

However, our conclusion is based on general terms. There are no clear-cut answers in trading, luckily, but we suggest you test many strategies yourself before you draw your own conclusions.