Take Profit order is an instruction to sell (in the case of a long position) or buy (in the case of a short position) a financial instrument when it reaches a specified price, allowing traders to lock in profits.
How does Take Profit work?
Setting the Take Profit: When entering a trade, a trader sets a Take Profit order at a specific price level. This price is typically set above the entry price for a long position or below the entry price for a short position.
Triggering the order: If the market price of the security reaches the Take Profit level, the Take Profit order is triggered, and the position is closed at the best available price. This action is automatic and does not require the trader to be actively monitoring the market.
Benefits of using a Take Profit
- Profit maximization: By setting a Take Profit level, traders can ensure that they lock in gains once the price reaches a favorable level.
- Automated trading: It allows for automated trading, removing the need for constant market monitoring and helping to avoid emotional decision-making.
- Risk management: It complements Stop Loss orders, providing a balanced approach to risk and reward in trading strategies.
Example of Take Profit in action
Long position: If a trader buys a stock at $100 and sets a Take Profit at $110, the Take Profit order will be triggered if the stock price rises to $110. This locks in a profit of $10 per share.
Short position: If a trader shorts a stock at $100 and sets a Take Profit at $90, the Take Profit order will be triggered if the stock price falls to $90. This locks in a profit of $10 per share.
Key points to remember
- Automatic execution: Take Profit orders are executed automatically, ensuring profits are realized without manual intervention.
- Price fluctuations: Market prices can fluctuate rapidly, so Take Profit orders help capture gains in volatile markets.
- Strategy integration: They are often used in conjunction with other trading strategies and orders (like Stop Loss) to optimize trading performance.