Here’s the truth:
No matter what strategy you use, you must take profits at some point to compound your earnings over time. Achieving this requires discipline—you can’t randomly take profits without a plan.
In this guide, you’ll master take profit orders and become a consistently profitable trader. Here’s what we’ll cover:
- What a take profit order is and how it executes on a chart
- Pros and cons of take profit orders in trading
- Common mistakes traders make (and how to avoid them)
- Strategies to maximize returns in different market conditions
What Are Take Profit Orders?
A take profit (TP) order closes your trade at a pre-set price level to lock in gains. It’s the opposite of a stop loss order, which limits losses. Both are limit orders you can place during or after trade execution.
How It Works on a Chart
- During Execution: Trading platforms let you set TP/stop loss levels before entering a trade.
After Execution: Three lines appear on your chart:
- Entry price (e.g., 130.718 for USD/JPY)
- Take profit level (e.g., 136.876)
- Stop loss level (e.g., 126.403)
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Pros and Cons of Take Profit Orders
When to Use TP Orders:
- Range markets: Set TP near resistance/support (e.g., swing trading).
- Swing trades: Capture short-term price reversals.
When to Avoid Them:
- Trending markets: TP orders limit profit potential during breakouts.
- Strong trends: Use trailing stops instead (more below).
Common Mistakes to Avoid
Mistake #1: Tight Take Profits
- Setting a small TP with a wide stop loss skews risk-reward unfavorably.
- Solution: Aim for a 1:2 risk-reward ratio or better.
Mistake #2: Adjusting Orders Mid-Trade
- Lack of conviction leads to moving TP/stop losses impulsively.
- Solution: Follow a trading plan and journal trades.
How to Use Take Profit Orders Strategically
1. Range Markets: Fixed Take Profit
- Identify support/resistance.
- Set TP just below resistance (for longs) or above support (for shorts).
- Example: EUR/USD in a daily range—TP at 1.0850 if resistance is 1.0870.
2. Trending Markets: Trailing Stop Loss
- Replace TP with a trailing stop (e.g., 1 ATR below swing lows).
- Lets profits run during breakouts (e.g., USD/JPY uptrend).
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Conclusion
- Use TP orders in ranges, avoid them in trends.
- Avoid tight TPs—prioritize risk-reward balance.
- Trailing stops > fixed TPs for trending markets.
FAQ
Q: Should I always set a take profit order?
A: No—only in range-bound or swing trades. Use trailing stops for trends.
Q: How do I calculate the best TP level?
A: Base it on support/resistance or a multiple of your risk (e.g., 2x stop loss).
Q: Can I adjust TP orders mid-trade?
A: Only if your trading plan allows it. Random adjustments lead to losses.
Q: What’s the biggest mistake with TP orders?
A: Setting them too close to entry, which kills profit potential.
Q: How do trailing stops work?
A: They automatically adjust to lock in profits as the price moves favorably.
Now, over to you: Have you struggled with take profit orders? Share your experience below!