Take Profit Order
Take Profit Order is the limit a trader sets to close an open position for profit. Traders use Take Profit to secure the profit they already gained from their trades, in case the market moves in the opposite direction abruptly.
Linked Limit and Stop Orders
The two main order types linked to open positions or pending orders are Stop Loss and Take Profit.
- Stop Loss order limits possible losses. It is set at a price lower than the opening price of the position or of the pending order execution.
- Take Profit order secures gains already acquired. It is set at a price higher than the opening price of the position or of the pending order execution.
When the security’s market price reaches the set limit for Stop Loss order / Take Profit order, the position closes automatically.
The set stop loss and take profit orders are removed automatically when the position is closed or when the pending order is cancelled.
Determining Take Profit Order
A profit target is one of the conditions traders set to exit a trade with secured gains. A profit target is basically the pre-determined price level a trader sets before closing a trade. It’s important to note your risk/reward ratio in trade, where ideally the reward outweighs the risk (e.g. risk/reward ratio of 1:2). Take Profit can be used hand in hand with Stop Loss to secure gains and limit losses, respectively.
When you trade with a profit target, you can assess whether that trade is worth taking. Assess your risk/reward ratio to determine the ideal price level for your take profit. If the potential profit does not outweigh the potential risk, avoid taking the trade. A profit target helps you avoid poor trades, but you must also know how to determine when to take profit.
When you place a profit target, like any trader, you want to get as much profit as you can in that trade. However, your profit target must still be based on the tendencies of the market. A profit target that is too high might be too unlikely to be reached. Therefore, a target profit must not be too close or too far. The bottom line is that a profit target must be determined according to the market flow of the security you trade and your risk/reward ratio.