If you want to know how to set targets in Options trading, this article will provide the essential guidance. As most experts believe, Options Trading deals with high risk. So you must only start trading in Options after you get your basics right.
How to Set Targets in Options Trading: The Short Answer
Determining how many points you want to set for your Target totally depends on you and your trading strategy. If you set a target of 40 points, you must wait for the price to reach (your buy price + 40 points). For example, if you have bought a Bank Nifty CE for a premium of ₹200, your target price will be ₹200 + 40 points = ₹240.
It All Starts with a Good Money Management Plan
Trading depends greatly on your psychology; you need perfect clarity before starting. You must get your basics right and the trading strategy simple. One important thing to understand is that you can only trade as long as you have capital. Hence, it's essential to keep your capital intact.
A money management plan will help you keep your capital intact, provided you religiously follow it for every trading session. A money management plan involves determining the following things:
- Number of trades per day
- Daily Profit and Loss
- Stop Loss and Target points
Determining the Number of Trades Per Day
Many beginners in the Indian stock market lose their entire capital out of overtrading. While some overtrade out of overconfidence, others overtrade out of desperation to get one winning trade to recover their losses.
What's important to understand here is that the price and the market aren't easy to predict, even for experts sometimes, even though you will have better clarity about the market as time passes. Hence, you need to be patient with yourself and determine the number of trades per day.
Every trade requires proper technical analysis, and as you take more trades, the accuracy of your analysis declines. 1 to 2 trades per day is a good number of trades.
Determining Your Daily Profit and Loss
Once you determine the number of daily trades, the next best thing to do is decide on your daily profit and Loss. It means how much profit you want to earn per day and how much Loss you are okay with. Once you reach your daily profit or Loss, you must stop at once for the day.
Even if you plan on taking two trades per day, you must not go for a second trade if you achieve your daily profit in the first trade itself. If the first trade doesn't go in your favor, you can always go for the second trade. However, you must ensure that your daily Loss equals two losing trades for the day.
Determining Your Stop Loss and Target
Trading without a Stop Loss can wipe off your entire capital in the Options market. Hence, you always need to consider placing a Stop Loss. Again, trading without a target is like trading aimlessly, and the worst-case scenario can be a winning trade unexpectedly turning into a losing trade.
The next question that is likely to cross your mind is how to determine the Stop Loss and Target points. Your Stop Loss in Options can be from 10 points to 20 points, even though some traders like to keep an even bigger Stop Loss.
Most traders suggest 20 points Stop Loss for traditional entry type since Options trading is highly volatile. However, it also depends on your trading strategy, levels, and entry type. Many traders like to keep their Stop Losses small using an ambush entry at pullbacks to their price levels.
Once you determine your Stop Loss points, it's time to decide on the target. It is where a Risk and Reward ratio comes into play, which can be from 1:1 to 1:3. Anything below 1:1 is a bad Risk and Reward. In Options trading, you must at least consider maintaining a Risk and Reward of 1:2. It means that for a Stop Loss of 20 points, you must have a Target of 40 points (20:40 = 1:2). One big mistake to avoid is to set set impractically big targets. You can determine a practical target by observing the market moves and rallies closely for both buying and selling side.
How to Set Targets and Stop Loss on the Option Contract's Price
Once you determine the Stop Loss and Target for your trades, you can find the price for them like this:
- Stop Loss price: Buy price – Stop Loss points
- Target price: Buy price + Target points
For example, if you buy a Bank Nifty CE for a premium of ₹200, you can place a 20 points Stop Loss at ₹200 – 20 points = ₹180, and your 40 points Target price shall be ₹200 + 40 points = ₹240.
There are two ways to place a Target price on your order. You can either use a GTT order with a Stop Loss and a Target price placed in the same order or trail your Stop Loss to your Target price once the price goes beyond your Target price.
Options Trading is risky, but you can succeed with proper money management. I have walked you through the various aspects of money management and explained how to set targets in Options trading. You must not start trading until you have a good management plan in place. While creating one, you must try to be as practical as possible with your risk and reward ratio.
Frequently Asked Questions
What are targets in options trading?
Targets in options trading refer to predetermined price levels traders use to determine when to exit a trade to secure profits or limit losses.
Why is setting targets important in options trading?
Setting targets is vital because it helps traders maintain discipline, manage risk, and make informed decisions based on predefined goals.
How do I determine my profit target in options trading?
To set a profit target, analyze market conditions, historical patterns, and technical indicators aligned with your trading strategy and risk tolerance.
Should I have multiple profit targets for a single options trade?
Yes, multiple profit targets are valuable. Traders often take partial profits at different levels to secure gains while leaving room for larger potential profits.
How do I handle situations where the market doesn't reach my target?
Evaluate why the market didn't reach your target. Decide whether to extend the target, exit with a smaller profit, or cut losses based on your trading plan and current conditions.