Take Profit Order

Take Profit Order

A Take Profit (TP) order is a standing order placed with a broker to automatically close a trade when the price reaches a specified target level. It’s a crucial risk management tool for traders of all levels, from beginners to experienced professionals, designed to secure profits and limit potential losses. This article provides a comprehensive overview of Take Profit orders, covering their function, implementation, benefits, and strategic considerations within a trading context.

What is a Take Profit Order?

In its simplest form, a Take Profit order is an instruction given to your broker to exit a trade at a predetermined price that will result in a profit. Unlike a simple market order which executes immediately, a TP order remains dormant until the market price reaches your specified level. When the price is hit, the order is automatically executed, closing your position and locking in your profits.

Consider this example: You believe a stock currently trading at $50 is likely to rise. You buy the stock and set a Take Profit order at $55. If the stock price increases to $55, your order is triggered, and your position is closed, securing a $5 profit per share. If the price never reaches $55, your trade remains open until you manually close it, or it’s stopped out by a Stop Loss Order.

Why Use Take Profit Orders?

The advantages of using Take Profit orders are numerous:

Profit Locking: The primary benefit is securing profits. Markets can be volatile, and a winning trade can quickly turn into a losing one. A TP order ensures you capture gains before a potential reversal.
Emotional Discipline: Trading psychology plays a significant role in success. Greed and fear can lead to poor decision-making. A TP order removes the emotional element by automating the exit process. You pre-define your profit target, and the order executes regardless of your current feelings. This is especially important for those new to Day Trading.
Reduced Monitoring: You don't need to constantly watch the market. Once a TP order is set, you can focus on other tasks, knowing your profits are protected. This is invaluable for traders with limited time or those who trade multiple assets.
Backtesting & Strategy Development: TP levels are integral to developing and backtesting trading strategies. By analyzing historical data with different TP levels, you can optimize your strategy for maximum profitability. Tools like TradingView are essential for this.
Automated Trading: Take Profit orders are fundamental to algorithmic trading and automated trading systems. These systems rely on pre-defined rules, including TP levels, to execute trades without human intervention.
Risk Management: While primarily focused on profits, TP orders indirectly contribute to risk management. By defining a potential exit point, you limit the amount of capital tied up in a single trade.

How to Set a Take Profit Order

The process of setting a Take Profit order varies slightly depending on your broker and trading platform. However, the basic steps are generally the same:

1. Initiate a Trade: First, you need to open a position (buy or sell) in the asset you wish to trade. 2. Access Order Settings: After opening the position, your trading platform will display order settings. Look for options like "Take Profit," "TP," or a similar label. 3. Specify the Target Price: Enter the price level at which you want the trade to automatically close. For a buy order, the TP price will be *above* the current price. For a sell order, the TP price will be *below* the current price. 4. Confirm the Order: Review the order details carefully to ensure accuracy, including the asset, quantity, and TP price. Confirm the order to activate it.

Most platforms allow you to set TP orders in several ways:

Price Level: Specify the exact price where you want the order to trigger.
Pips/Points: Set the TP level as a number of pips (for Forex trading) or points (for other assets) above or below the entry price. This is often easier than calculating a specific price.
Percentage: Some platforms allow you to set the TP as a percentage gain or loss from your entry price.

Factors to Consider When Setting Take Profit Levels

Choosing the right Take Profit level is crucial for maximizing profitability and minimizing risk. Here are several factors to consider:

Support and Resistance Levels: Support and Resistance are key price levels where the price tends to find support or encounter resistance. Setting a TP order near a significant resistance level (for a buy order) or support level (for a sell order) can increase the likelihood of it being hit. Understanding Fibonacci Retracements can also help identify potential TP levels.
Chart Patterns: Different chart patterns suggest potential price targets. For example, a bullish Head and Shoulders pattern might indicate a TP level at the height of the "head."
Technical Indicators: Use technical indicators to identify potential TP levels. For example:

   * Moving Averages:  Set a TP order near a significant moving average.
   * Bollinger Bands:  The upper band of a Bollinger Band can serve as a TP level for a buy order.
   * Relative Strength Index (RSI):  An overbought RSI reading (above 70) might suggest a TP level for a buy order.  See also MACD.

Volatility: Higher volatility generally requires wider TP levels. The Average True Range (ATR) indicator can help you assess volatility.
Risk-Reward Ratio: A fundamental principle of trading is to aim for a favorable risk-reward ratio. A common target is a risk-reward ratio of 1:2 or 1:3, meaning you aim to profit at least twice or three times the amount you risk. Calculate your TP level based on your stop-loss level and desired risk-reward ratio.
Market Trends: Consider the overall market trend. In a strong uptrend, you might set more ambitious TP levels. In a sideways market, tighter TP levels might be more appropriate. Analyzing Elliott Wave Theory can provide insights into trend strength.
Timeframe: The timeframe you're trading on will influence your TP levels. Shorter timeframes require tighter TP levels, while longer timeframes allow for wider TP levels.
Previous Price Action: Analyze previous price swings to identify areas where the price has previously struggled to break through. These areas can serve as potential TP levels.

Take Profit vs. Stop Loss Orders

Take Profit and Stop Loss Orders are complementary tools for managing risk and maximizing profits. While a TP order aims to secure profits, a Stop Loss order aims to limit losses.

| Feature | Take Profit Order | Stop Loss Order | |---|---|---| | **Purpose** | Secure profits | Limit losses | | **Execution Trigger** | Price reaches a target profit level | Price reaches a predetermined loss level | | **Impact on Position** | Closes the position and locks in profits | Closes the position and limits losses | | **Direction of Price Movement** | Activated by favorable price movement | Activated by unfavorable price movement | | **Psychological Benefit** | Removes emotional decision-making when profits are reached | Removes emotional decision-making when losses occur |

Both TP and Stop Loss orders should be used in conjunction to create a well-defined trading plan.

Advanced Take Profit Strategies

Beyond simply setting a fixed TP level, several advanced strategies can enhance your profit potential:

Trailing Take Profit: A trailing TP automatically adjusts the TP level as the price moves in your favor. This allows you to capture more profits as the trend continues. Many platforms offer a trailing TP feature.
Partial Take Profit: Close a portion of your position at a predetermined TP level and let the remaining portion run for further profit. This allows you to secure some profits while still participating in potential upside.
Multiple Take Profit Orders: Set multiple TP orders at different price levels. This allows you to take profits at various stages of the price movement. For example, you might set a TP order at $52, $55, and $58.
Take Profit Based on Volatility: Use the ATR indicator to dynamically adjust your TP levels based on current market volatility.
Take Profit with Confluence: Look for confluence of multiple technical indicators or price action signals to confirm your TP level. For instance, a TP level coinciding with a resistance level, a moving average, and an overbought RSI reading would be considered a strong TP level.
Scaling Out: Similar to partial take profit, this involves gradually reducing your position size as the price reaches predetermined profit targets. This is a common strategy in Swing Trading.

Common Mistakes to Avoid

Setting TP Levels Too Close: Setting TP levels too close to your entry price can result in being stopped out prematurely due to normal market fluctuations.
Setting TP Levels Based on Hope: Don't set TP levels based on what you *hope* the price will do. Base them on sound technical analysis and risk management principles.
Ignoring Market Context: Consider the overall market trend and volatility when setting TP levels.
Failing to Adjust TP Levels: As the market evolves, be prepared to adjust your TP levels accordingly.
Not Using TP Orders at All: The biggest mistake is not using TP orders at all. They are an essential component of a disciplined trading strategy. Understanding Candlestick Patterns can aid in setting appropriate levels.

Take Profit Orders and Different Asset Classes

The application of Take Profit orders can vary slightly depending on the asset class you are trading:

Forex: TP orders are commonly set in pips.
Stocks: TP orders are typically set in dollars and cents.
Cryptocurrencies: TP orders are usually set in dollars or the equivalent cryptocurrency value.
Commodities: TP orders can be set in dollars, cents, or the unit of measure for the commodity.
Options: Take profit strategies for options are more complex and often involve considering factors like time decay (Theta).

Conclusion

Take Profit orders are an indispensable tool for any trader seeking to manage risk, secure profits, and implement a disciplined trading strategy. By understanding their function, implementation, and strategic considerations, you can significantly improve your trading performance and achieve your financial goals. Remember to always combine TP orders with Stop Loss orders for comprehensive risk management. Continual learning and adaptation are key to success in the dynamic world of trading. Studying Japanese Candlesticks is highly recommended.

Risk Management Trading Strategy Technical Analysis Forex Trading Stock Trading Cryptocurrency Trading Trading Platform Order Types Trading Psychology Algorithmic Trading

Start Trading Now

Sign up at IQ Option (Minimum deposit $10) Open an account at Pocket Option (Minimum deposit $5)

Join Our Community

Subscribe to our Telegram channel @strategybin to receive: ✓ Daily trading signals ✓ Exclusive strategy analysis ✓ Market trend alerts ✓ Educational materials for beginners