When you are just starting out with fx trading, it is important to get yourself familiar with the Forex trading terminology and jargon at first, so you can understand complex information a bit easier. In today’s article, we will be taking a look at one of the most common order types in trading – a Take Profit order, its definition, meaning, and the way it works.
What is Take-Profit Order ?
Take-Profit Order (T/P) is a type of limit order that represents the target price at which a trader fully or partially closes a trading position and collects profits.
Limit and Market Orders
There are two categories of orders: Limit and Market orders. Market orders get executed manually and enable traders to buy or sell assets at current prices in a current moment. Take profit orders get executed automatically (as any other limit order) whenever the price reaches a predetermined level. On the downside, prices may never get close to that level and leave the limit orders unfilled.
Trading using Take Profit targets is not essential for most traders. Whereas placing Stop Loss orders is an absolute must. The reason for this is simple: you can run your profits but you will blow your account if you decide to run your losses.
Take Profit targets are different for each trader. As already mentioned, some traders like to run their profits and trade without fixed profit targets. These traders will experience more frequent losses as prices do not change in a straight line. On the other hand, winners can be massive and engulf the total amount of losses.
Those traders who use Take Profit orders, generally try to match 1(risk):1 or higher (reward) ratios.
It’s important to note that take profit orders are not fixed and you can change them once you’re in a trade. Let’s discuss a simple scenario:
Let’s say you’ve decided to join a trend, already have put stop loss and take profit orders in place and are witnessing the price going in your direction. The trend is backed by the high volume and seems to way past your profit targets. You can simply remove or change the target using your trading software. Or if you’re not sure whether the trend will continue or not, you can use trailing stops or close positions partially. That way even if the price reverses, you stay in profit and remain in the position longer.
It’s recommended to place or change the take profit targets using predetermined rules. You can’t just place a market and limit orders according to your mood. Moreover, you can skip using the TP targets as well but this also needs to be a part of your trading strategy. As traders often say, you should plan your trades and trade your plans.