Traders worldwide study the financial market almost every day, with a single aim to improve their trading. They’re trying to discover and understand different approaches, techniques, and orders that will provide them with more success and profits. One of the main questions among traders is, “What is a take profit order and how it can improve their trading in the long run?”
For those asking themselves what a take profit order is, the most precise answer is that it represents a limit order that specifies the exact price at which traders will close out an open position for profit. In case the security price doesn’t reach the limit price, it’s evident that the take profit order won’t be filled.
In other words, a take profit order refers to a standing order for selling security when that security reaches a certain level of profit. Selling at this price is a warranty that the trader will make a significant profit on the trade. The symbol of a take-profit order is T/P.
Traders are eager to learn what a profit order is better to have provided you with additional information to help you master this limit order.
Understanding a take profit order better
A significant number of traders from all over the world use a take profit order, or T/P, in tandem with stop-loss orders, S/L, to have control over their open positions and control them the best. The T/P order will be educated once the security rises to the take profit point, and the position will be closed for a gain.
On the other hand, the S/L position will carry out if the security falls to the stop-loss point. Thus, the position will be closed for a loss. What helps define the trade’s risk-to-reward ratio is the difference between these two points and the market price.
For those who aren’t familiar with the “risk-to-reward ratio,” it’s used by numerous investors and traders to manage their risk of loss and capital. The ratio, in this case, helps assess the expected return and risk of a given trade. Anything greater than 1:3 is an appropriate risk-reward ratio.
What does a take profit order allow you?
A take profit order will allow a trader to limit its risk exposure in order to market by existing your trade once the market prints a favorable price for him. It means not staying in any longer. As you’re aware, setting a T/P order requires an excellent technical analysis and the probable movement of the market.
Some of the most popular strategies for calculating an appropriate take-profit order include the following:
- Chart pattern analysis
- The actual average range plus an overnight extreme
- A daily or weekly pivot point
A profit order represents an automatic exit strategy based on a profit-loss calculation rather than a decision to hold or sell strong emotions.
What is the benefit of using a take-profit order?
Still, those who were wondering “What is a take profit order” would definitely want to know the benefit of using it in the first place. Therefore, we’d like to point out that the main benefit of using a take profit order is that traders do not have to bother about second-guessing themselves or manually executing a trade.
However, profit orders are always executed at the best price regardless of the underlying security behavior. What’s important to understand is that the stock could start to breakout higher, but the take profit order is able to execute right at the beginning of a breakout. That could result in high opportunity costs.
Take profit orders recommended
Experienced traders agree on one specific thing: short-term traders, who’d like to manage their risk, are highly recommended to take profit orders.
The main reason for that is that short-term traders can get out of a trade at the same time as their planned profit target is reached and not risk an expected downturn in the market. Remember that all traders who are fans of long-term strategies don’t precisely like such orders since they cut into their profits.
So, for those who are asking themselves how to take profits in trading, short-term traders should try with this proven take profit order and follow other valuable tips and guides from more experienced traders.
Where are the take profit orders placed?
Take profit orders commonly pop up at levels defined by numerous other forms of tech analysis. These technical analyses include:
- Resistance levels or using money management techniques
- Chart pattern analysis
It’s crucial to understand that many trading system developers use take-profit orders once they place automated trades. It’s because they are able to be well-defined and serve as a fantastic risk management technique.
What is a take profit limit order?
For those who are wondering, “What is a take profit limit order” the answer is relatively simple. It’s almost the same as the simple T/P. However, limit orders guarantee traders the limit price or better. However, it cannot always guarantee that all of your volumes will carry out.
In other words, a take profit limit order refers to a type of limit order that enables traders to set a target profit price at which a limit order gets triggered that looks for buying or selling assets, maximizing the profit obtained.
The best example of the order
For a ubiquitous question among traders such as “What is a take profit order?” there is no better way of explaining it than giving a good example of it. Let’s imagine the following situation:
A trader spots an ascending triangle chart, which is a pattern used in technical analysis, and then opens a new long position. If the stock has a breakout, it’s expected to rise to 15% from its current levels. On the other hand, if it doesn’t break out, the trader will quickly exit the position and move on to the next opportunity possible.
Thus, the trader could create a take profit order 15% higher than the market price. The reason for that is to sell once the stock reaches that exact level automatically. Simultaneously, they could place a stop-loss order that is 5% below the current market price.
What does the combination of T/P and S/L order create?
The combination of the take profit T/P and stop-loss, S/L order creates a 5:15 risk-to-reward ratio. That’s more than favorable since the odds of reaching each outcome are equal, or in case the odds are skewed toward the breakout scenario.
How to set a take profit order exactly?
Besides “What is a take profit order,” another question among traders is – how to set it exactly. Since setting the order is of interest to a large number of traders around the world, we have decided to simplify the following step-by-step guide as much as possible:
- Utilize your risk-reward ratio to set your take profit – For instance, if you risk 5% of your funds, you’re able to set your TP 5% above the current price. If that’s the case, and if the stock trading is at $20, you’re able to place it at $21. Even though it looks like a small level, don’t forget that’s a 5% return on your trade.
- Fibonacci retracement can also be another great approach to setting a profit order. For example, we have a price that is trading at $20. That’s the 23.6% retracement level, and you’re able to add a take profit at the 38.2% level at $24. In many cases, once the price moves above the 23.6% retracement, there’s a chance that it will test the 38.6% level. Thus, you can make a take profit there.
- The psychological level is also a great thing to use. We want to explain it better with further examples. If the price of crude oil, for example, is trading at $63 and it goes above $66, we assume that the resistance level will be at $70. Remember that round numbers are crucial levels since numerous day traders place their take profits and stop losses there.
What are the main take profit pros and cons?
In addition to all that, many short-term traders became interested in learning the good and bad sides of this type of order. Let’s start with the pros of the order, shall we?
Pros of a take profit order
- Ensure a profit
- Minimize risk
- No second-guessing
Cons of a take profit order
- Not suitable for long-term traders
- Can’t take advantage of trends
- It might have implementation trouble.
Summary
- A take profit order represents a standing order that provides selling security once it reaches one specific profit level.
- In case the desired point is not reached, the sale will not be executed. On the other hand, the trader holds on to the security.
- Take-profit orders refer to a short-term trading strategy that’s highly recommended to day traders. With this strategy, day traders can take advantage of a quick rise in the market in order to make an immediate and significant profit.
- Using a take profit order strategy will minimize your risk and avoid emotional decision-making at the moment.
