One of the most frequent questions I get from my mentoring students is how to calculate where to exit a trade for your profit goal. Some trades have margin while others don’t and some trades are debits and some are credits.
This can all lead to confusion as to what a closing order should be.
Ignoring commissions for this example, if you have a trade that costs $250 debit and the margin is $1000 what would you want to sell it for to make 10%?-
The trade cost you $1250 so you need $125 ($1.25) more than you paid you make 10%. So $2.50 you paid + $1.25 is $3.75. $3.75 is your sell price for 10% profit.
Credit and Margin
If you have a trade that gives you a $250 credit and the margin is $1000, what would you want to sell it for to make 10%?-
$1000 in margin minus $250 target = $750 which is the cost of the trade.
So you need to buy back this credit spread for $75 or .75 less than you paid for it. So if sold at a $2.50 credit, the closing target is $1.75.
You can simply add in your commissions to the cost of the trade and set your closing order appropriately. I hope this helps traders with this frequent question.