The thing that some people disregard, in relation to small profit targets, is that your probabilities of profit increase astronomically! Having said that, there is nothing wrong with going for the bigger profit target, if that's your way to trade (there is no ONE right way for everyone). Some people don't see the sense in taking anything that has less than a 3:1 reward/risk ratio (I used to be one of them!) while others don't see the sense in taking small profits.

For those of you who care, here's my reasons for small profit targets in a nutshell:

1. the "reward" part of a reward/risk ratio is pure speculation. The only part of the equation that is known with some certainty is the risk side. You'll know how much you will lose if the trade goes badly, but saying you will earn 12 ticks is nothing more than guesswork. Yes, you will have your reasons, but the profit side of the equation is ALWAYS unknown.

2. small profit targets increase the probability of a profit. This has been proven time and again. Do the work yourself if you don't believe me. A 1 tick profit target has nearly a 99% chance of success. That means that statistically speaking you will have 99 winners for every loser. Okay, so the broker takes the better part of a one tick trade, what about a 2 tick target?

Two ticks have a better than 80% chance of success. That means that 8 out of 10 trades are winners and 2 are losers. Let's say you're trading the emini and you have two, 6 tick losers and 8, two tick winners. How does that work out? 8 winners at $25 each is $200 profit. 2 losers at $75 each is $150 in loses. That's a $50 profit.

Big deal you say? Maybe, but anyone who has been in the trading arena for a while knows that the real money is never in single contracts. What if you're trading 5 contracts? Even a modest account can manage 5 contracts (that doesn't mean your nerves can though!) All of a sudden you've made $250. Better. How about 10 contracts? That's $500. Not bad. 12 contracts? $600. And that's assuming a 6 tick loss on each losing trade!

What if you were able to shave a tick or two and keep you losers to 4 or 5 ticks (which is not unreasonable)? A 5 tick loser x 2 increases your profit to $375 (5 contracts) and $750 on 10 contracts! Now we're getting into some pretty serious money and all from taking a couple of ticks!

3. small profits with volume are the way the really big traders play and you don't see too many of them losing money. You've heard of arbitrage? We can't do that as a small spec, but for those who are unfamiliar with the concept it's when traders trade huge volume for 1/4 points (more common in the stock market but equally as effective). Doesn't seem like a lot does it? But it's the closest thing to guaranteed money that there is in the trading world. The rent on Wall Street ain't cheap and you don't see too many big traders driving Chevy's so there must be something to their "secret".

4. last, but not least, small profit targets are much easier on the nerves! There's nothing like putting money into your account to boost your confidence. We've all been there, sweating a trade that backed up on us when we could have easily been out with a 2 or 3 tick profit target (note a 3 tick target drops your success ratio to about 72%)

---

Does this mean that you shouldn't go for the "home run"? Of course not. Personally I'm always trying to nail an 8 tick trade in the emini, and sometimes I'll even get it. But you need to find what works for you. If you're a small trader, or just starting out, I believe you won't go too far wrong trying the small profit strategy. Papertrade it if nothing else. See if it works or not. You'll find out soon enough if it's for you.

FYI,

Erich