Keep in mind that using cutoffs, as explained in this article, does not work for every trader. Some systems require you to take every setup that comes along, whether you’re up or down, in order to take advantage of the edge that the system provides.
Each trader has their own level of risk tolerance and desired daily, weekly and monthly profit targets. Many successful traders use daily, weekly, monthly and even yearly cutoffs.
New traders shouldn’t concern themselves with profit goals but instead, focus on consistency. That being said, what are some realistic profit goals for a successful Forex trader?
Setting Realistic Profit Targets in Trading
It all starts with setting realistic daily goals. Swing traders might start with weekly goals for obvious reasons. It is important to set your goals in actual profits, as opposed to pips.
It is also important to use the same amount of risk (exposure) on every trade. Varying exposure is a good way to wipe out your account – even if you’re using a solid trading system.
Daily goals are largely determined by your level of risk tolerance. For instance, I risk 1% per trade. My daily profit cutoff is 2%, so I only need one or two successful trades with no losses to hit that mark.
If you are only risking .5% per trade, a more realistic daily profit cutoff might be 1% per day. Shooting for 2%, while risking .5%, would take two to four successful trades with no losses to achieve. In other words, it’s not likely to happen.
Note: Don’t just jump into the market. Learn a good trading system, and then backtest and demo trade until you prove to yourself that you can be consistent in the long run (months or years – not days or weeks).
When you start trading a live account, use the smallest lot size (or number of shares, contracts, etc…) available to you at first. Gradually increase your exposure per trade to your desired risk level as you become accustomed to the psychological hurdles of trading real money.
I am comfortable risking 1% per trade. Most successful traders would recommend using .5 – 2% per trade. Very advanced traders often risk 3% or more per trade. How much money are you willing to lose per trade? Once you have determined your personal level of risk tolerance, you can determine a daily goal or cutoff.
Weekly and Monthly Goals
From there, your weekly and monthly cutoffs can be set. I have a more aggressive risk tolerance, so my profit cutoff targets are as follows: 2% daily, 5% weekly and 15% monthly. I don’t use yearly cutoffs.
These targets may seem high to some traders, but they are realistic for me.
Note: This does not mean that I make 2% every day, 5% every week, etc…. If I make 2% in a day, that’s a good day of trading. Likewise, 5% is a good week of trading.
If you are not consistent yet, you should focus on learning a profitable trading system and becoming a long-term, consistently profitable trader. If you’re just starting out, shooting for 5% per month makes much more sense.
If you think that you can double your account every few months in trading, you are not likely to set realistic profit targets. You will likely overtrade your way to a smaller account balance.
You will risk too much, and you will lose too much. Greed causes traders to be overconfident and overactive in the market, which leads to mistakes. Small consistent and compounded profits will lead to a fortune in the long run.
Remember: Money management cutoffs work both ways. If I am down 2% in one day (or two losses in a row), I stop trading that day. I stop trading if I lose 3% in one week. Lastly, I use 5% as my monthly losses cutoff. Keep in mind that I have a more aggressive risk tolerance.
The Importance of Setting Realistic Profit Targets
In my opinion, money management skills are the most important aspect of achieving long-term profitability. I never made any consistent profits in the Forex market until I learned how to manage my risk.
Setting realistic profit targets is an important part of good money management, and setting the maximum amount you are willing to lose per day, week, and month is equally as important.
Another aspect of good money management is risking a small percentage (.5 – 1% or less) of your total account balance per trade. Depending on your trading style, you should also only take trades with the potential of making twice what you are risking or more. That ratio is known as the risk – reward ratio.
Example: Let’s say your account balance is $2,000. You place a trade risking 1% of your account or $20. The trade goes your way and hits your profit target, resulting in a closed trade and a $40 win. Since you risked $20 and profited $40, this trade would have achieved a 1:2 risk to reward ratio.
If your average winning trade achieves at least a 1:2 risk/reward ratio, you can be profitable with a 50% win rate. With a 1:1 ratio, you would break even if you won half of all the trades you took. It’s easy to see that the risk/reward ratio is an important part of good money management.
In trading, you are almost guaranteed to experience runs of consecutive losses from time to time. Risking a small amount per trade, and setting a maximum acceptable loss percentage can ultimately limit the harmful effects of drawdown periods – helping you preserve your capital.
To new traders, these concepts may seem foreign, but they are absolutely essential to long-term profitability. By using proper money management, including realistic daily, weekly and monthly profit targets and cutoffs, you are ultimately reducing your risk.