Take Profit is an order which automatically closes your trading position once it reaches a predefined price level set by you. Take Profit books your profits - when the price level set in the order is hit, your position gets liquidated with the profit and you’re out of the market.
Thanks to that, a Take Profit order allows you to achieve a predetermined financial result. On the flip side, in some situations, it may limit your potential profits. It is commonly believed that from the psychological point of view it’s much easier to set a Take Profit order than a Stop Loss order - it’s so-called "a positive investment scenario". As a Take Profit order books trading profits it has to be placed higher than your entry price when you’re buying and below the entry price when you’re selling.
Example of a Take Profit order
You decided to open a long position on EURUSD - that is you bought EURUSD currency pair at 1.20. As Forex trading is your additional job and you don’t have enough time to constantly monitor Forex charts, you decided to place both Stop Loss order at 1.10 and Take Profit order at 1.30. It means, that if EURUSD falls to 1.10 your order will get closed with a loss or when EURUSD hits 1.30 your profits will get booked and position closed with a profit. It turned out that just after you opened the position EURUSD went up to 1.31 - your position got closed - and then fell down to 1.09. As you set Take Profit at 1.30 the position was closed and it helped you to book all your profits. As when EURUSD dropped to 1.09 you already didn’t have any position opened, you didn’t incur any loss.
Take Profit order can be set to short positions as well, that is - when you’re selling financial instruments. For example, you decided to go short on Gold at a price of 1350 USD/oz. You set your Take Profit at 1200 USD/oz and Stop Loss order at 1500 USD/oz. By setting these two orders - Take Profit and Stop Loss - you created a ‘channel’ in which your position gets closed either in profit or a loss. As you predicted the price movement well again, the Gold price went down to 1195 USD/oz - Take Profit order was hit and your position got liquidated. You were out of the market but Gold priced kept falling down to 900 USD/oz. You didn’t earn additional profits as your position was closed at the Take Profit level of 1200 USD/oz.
Pros of Take Profit
The investor's habits and strategy determine the use of Take Profit. Supporters of the Take Profit order claim that it is an ideal tool to support the maintenance of investment discipline. Opponents of Take Profit say that by using this order a trader prevents himself from taking advantage of the prevailing trend and gain extraordinary profits. As always, the truth lies in the middle.
Most Forex traders use Take Profit orders when they’re trading in a choppy market - when they think that the market will reach a new maximum point only for a short period of time and immediately after reaching it will start to reverse. Take Profit helps them to get out of a market before the reversal happens. Another use of a Take Profit order is when markets are ranging - when the price remains in a horizontal trend, fluctuating around current levels. Take Profit allows you to close long positions at the top of these fluctuations or short positions at the bottom of the fluctuations.
Cons of Take Profit
Use of Take Profit in your trading can also be detrimental to your rate of return. For example, if you’re trading in a strong market trend and you expect that once the price reaches a certain level, the price movement will be continued. By setting a Take Profit at a fixed level you would limit your profits, just as in the second example when you set your Take Profit on Gold at 1200 USD/oz and Gold kept going down to 900 USD/oz. In this case, without setting Take Profit and with proper patience and trading plan, you could gain additional profits by closing the position much lower.
Should I use Take Profit?
Beginners are wondering if the use of basic pending orders is justified. Every trader decides for himself and use of Take Profit order depends on the trading plan and money management rules. Without a doubt, Take Profit orders save a lot of time as thanks to them a trader does not have to follow the quotes all the time waiting for the right time to close the position. What’s more, Take Profit helps to maintain trading discipline which is extremely important, especially for beginners.