What Is a Take Profit Order?
A Take Profit (TP) Order is a type of limit order that automatically closes a trade once the price reaches a predefined profit target. It helps traders lock in gains by exiting a position at a specific favorable price, without having to monitor the market continuously. Take profit orders are commonly used alongside stop-loss orders as part of a risk-reward strategy.
Key Takeaways
- A take profit order closes a trade automatically when a certain profit level is reached.
- It is a limit order set above the entry price for long positions or below it for short positions.
- Helps secure profits without requiring manual intervention.
- Often used with a stop-loss order to create a balanced exit strategy.
- Ideal for traders with predefined targets or time constraints.
How Take Profit Orders Work
When a trader enters a position, they can place a take profit order to exit once the market moves favorably to a predetermined price level:
- Long Position: Take profit is set above the entry price.
- Short Position: Take profit is set below the entry price.
Example
You buy EUR/USD at 1.1000 and set a take profit at 1.1050. When the price reaches 1.1050, the order executes, securing your 50-pip gain.
- Key aspects:
- The order guarantees exit only at the specified price or better
- In volatile markets, TP orders may be missed or partially filled, depending on liquidity.
- Unlike market orders, they are not executed immediately but wait for the price trigger.
Examples of Take Profit Orders
- A stock trader sets a TP order to sell Tesla shares at $250 after buying at $220.
- A forex trader buys GBP/JPY and sets a take profit 100 pips above the entry point.
- A crypto trader uses TP orders to automatically close positions during price spikes.
Benefits of Take Profit Orders
- Locks In Gains: Secures profits before the market reverses.
- Emotional Discipline: Reduces the temptation to close trades prematurely or hold too long.
- Time Efficiency: No need to monitor charts constantly.
- Strategic Trading: Aligns with technical targets or risk-reward ratios.
Costs and Limitations
- Missed Upside: Price may continue moving favorably after the TP triggers.
- Not Guaranteed: In illiquid or fast-moving markets, execution may be delayed.
- Over-Reliance: Can limit adaptability to changing market conditions.
- Fixed Targets: Doesn't account for evolving trends or news events.
Who Uses Take Profit Orders?
- Day Traders: To exit quickly when a price target is hit.
- Swing Traders: For mid-term strategies tied to support/resistance levels.
- Algorithmic Traders: To automate profits as part of coded strategies.
- Risk-Averse Investors: To secure gains at predefined milestones.