The Take Profit order, or how to take profits in the right way and at the right time

The take profit order allows the investor to take trading gains automatically when a given price level is reached.

An essential tool in money management techniques, take profit orders allow the trader to optimize the gains of winning positions. Depending on their strategy, traders have more or less ambitious price objectives. The positioning of a take profit order guarantees they do not miss the exit opportunity when the target is reached.

What is a take profit order ? Why place a take profit order ? How and where to place a take profit order ?

Here is a complete summary of the information you need to know to learn how to position your take profit orders properly.

What is a take profit (TP) order ?

By definition, a take profit order is a limit order, i.e. a buy or sell request that allows the investor to wait for a more attractive price level (the limit).  Triggered automatically when the limit is reached, the take profit order allows the trader to take gains when the price has moved in their favor. The latent profit that was previously only hypothetical finally materializes in his trading account.  

Why use a take profit order ?

Unlike the use of a stop-loss order (which is highly recommended in trading), placing a take profit order is optional. Indeed, some traders prefer not to place a take profit order and let themselves be carried along by the trend until it ends, while others prefer to secure their gains when a key level is reached by placing a take profit order. Once the trader has defined his target, placing a take profit order guarantees that he will not miss his target.

Price movements are sometimes extremely sudden and short-lived : wanting to take profits manually when the expected price level is reached exposes the trader to the risk of not being able to close the position in time. Like all automated orders, the take profit allows the investor not to have to stay in front of screens throughout the trading session. They can then go about their business and free themself from the stress of manual trading. At the same time, it frees traders from psychological bias that can lead them to take profits too early.

Finally, the anticipated positioning of a take profit order allows traders to know the profit/loss ratio from the moment they enter the position, and therefore to estimate the success rate on this type of trade to be profitable in the medium and long term. As a reminder, this ratio can be calculated very simply by taking the ratio of the distance between the entry point and the take profit, divided by the distance between the entry point and the stop-loss.

How and where to position your take profit

The famous banker Baron James de Rothschild liked to say that he "made his fortune by always selling a little too early". If the temptation is sometimes great to try to grab a few more euros on winning trades, it is also necessary to know how to keep reason and take profits wisely when the objective is reached. To position a take profit order, the trader just needs to create it at the same time as the entry order on the market, or to create it afterwards either by adding this option on the current position, or by placing another limit order in the opposite direction to the open position (short if the position is long, or long if the position is short). As for where to place your take profit order, it all depends on the trading strategy you wish to implement. 

Scalpers, for example, are content to pick up a few pips per trade by placing take profits very close to their entry points in position.

Day traders look to place take profit orders further out, but which are highly likely to be reached during the current session, so that they do not have to stay in an overnight position. Pivot points are often used as benchmarks to determine the optimal location of take profit orders. In day trading as well as in swing trading, chart analysis is also used to identify historical supports and resistances in order to position take profits of short positions near supports and take profits of long positions near resistances.

Although each trader has their own "recipe" for optimal take profit positioning, trading algorithms have been contributing to the process for several years. Thanks to statistical analysis, it is indeed possible to optimize the placement of his take profit order. In this situation, the trader simply selects the asset to be traded, chooses a direction (buy or sell), and defines their risk level. The machine then takes care of placing the order taking into account the trader's investor profile, the price history, and the current market situation. 

Now you have some tips on how to place your take profit orders correctly for your next trades. Whatever your strategy, remember that it will be of no use if you don't stick to the plan. Too many traders give in to the tendency to move their take profit orders out of greed or fear of seeing their latent capital gains disappear... To avoid this kind of disappointment, consider exploring the solutions offered by automatic trading.