A take profit order is a standing order to sell a security once it reaches a certain level of profit. Selling at this price ensures that the trader will make a profit on the trade.
Learn how a take profit order works to minimize risk and who should use one.
What Is a Take Profit Order?
A take profit order is a standing order put in place by traders to maximize their profits. It specifies a certain price above the purchase price, which is chosen by the trader. If the price of a security reaches that limit, it will automatically trigger a sale. If the price does not reach that limit, the order is not acted on.
A take-profit order is a short-term trading strategy. It is useful for day traders who want to take advantage of a quick rise in the cost of securities to make an immediate profit.
It is a type of limit order, though limit orders can be used to either buy securities at a low price or sell them at a high price.
Alternate name: Take-profit order, limit order, sell limit order
Acronym: T/P order
How Does a Take Profit Order Work?
To use a take profit order, day traders establish a price at which they want to sell a security. This price is one sufficiently above the price at which the security was bought to ensure that traders will make a profit on the sale.
Once the take profit point is reached, the order is triggered and the sale goes through at that day’s current market value. If that point isn’t reached, the sale is not executed, and the trader holds onto the securities.
A T/P order allows you to limit your risk or exposure to the market by exiting your trade as soon as the market prints a favorable price for you and not staying in any longer.
Setting a take profit order requires a technical analysis of the security’s value and the likely movement of the market. Some strategies for calculating an appropriate take profit order include:
- The average true range plus an overnight extreme
- A daily or weekly pivot point
- Chart pattern analysis
A T/P order is an automatic exit strategy based on a profit-loss calculation, rather than an emotional decision to sell or hold.
So, you already know that it is quite beneficial. But if you really want to get profited, you must go with a proper trading plan. Because a proper trading plan will be the best solution of all your trading problems. Read the definitive article about a proper forex trading plan.
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