Day traders use target orders to automatically exit their trades when their trades are in profit by a predetermined amount. Target orders are usually limit orders, and are usually placed as soon as a trade is entered. This means that the target order is active throughout the trade, while it waits for the price to trade at the target price. Once the price trades at the target price, the target order will be filled, and the trade will be exited with the appropriate amount of profit.
Target orders should be placed at the price that corresponds to the optimal amount of profit. For example, if a trading system enters trades that usually go more than 80 ticks into profit, but rarely go 85 ticks into profit, a good target would be 80 ticks. Placing target orders correctly allows the right combination of long term profit and short term risk.
Why Are Target Orders Necessary?
One of the main reasons for using target orders is that they remove the trader from the decision of when to exit the trade and how much profit to take. Beginning day traders are often affected by the emotions of fear and greed, and this can cause bad decisions about exiting trades. Correctly placed target orders will make sure that every trade is exited at the optimal amount of profit (if that amount of profit is available), without being affected by the emotions of fear and greed.
Increasing Targets is a Mistake
Once a target order has been placed, it should not be moved under any circumstances (unless it has been placed incorrectly). One of the reasons for using target orders is to remove the trader from the profit taking decision. If a target order is moved, the trader is still controlling the profit taking decision, and is not letting the target order do its job.
The usual reason that traders want to move their targets is because the price is moving in their direction, and they want to take as much profit as they can. The problem with this is that the trader is no longer taking the optimal amount of profit, and the long term result will be less profit.
Greed is the emotion that causes this desire to take more profit, and can be so strong that a trader will increase their target, even though they know that doing so is a mistake. Some trading software has a feature that prevents target orders from being modified, and this is a good solution for traders that cannot overcome their greed.
