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Trading Terms: Glossary and Definitions for Traders
Take-Profit Order

Take-Profit Order

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A take-profit order is an order submitted by a trading participant to a broker, together with the conclusion of a transaction on an exchange instrument. Take-profit order indicates the need to make an opposite transaction (for example, the sale of an asset if it was acquired, and vice versa).

Setting take-profit order makes it possible for a trader or investor to set a target for a certain transaction and, in case of price movement in a given direction, to lock in a profit.

Let’s look at using a take-profit order in a simple example. The investor purchased 200 shares of company A at a price of $200, with the expectation that the share price would rise and reach $220 per share. The investor is not sure about further price growth. With a purchase order, the investor gives the broker an order for a take-profit order at $220. There is an increase in the share price, it reaches the desired value. The take-profit order is triggered, the shares are sold, and the investor receives his profit in the amount of $4,000. Even if the price continues to rise further, of course, it will not bring him any additional income, since after selling the securities he no longer participates in the market. If the price bounces below $220, he also doesn’t care anymore, since the profit has already been fixed in the broker’s account.

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Note: Some traders and investors consider take-profit order to lock in profits to be an irrational tool, arguing that it is possible to lose profit if the price continues to rise after the take-profit order is triggered. But if the take-profit order level is chosen correctly, a rollback is a more realistic option for the development of the situation. In this case, the profit that the investor did not receive may be much more. A profitable position can become unprofitable in the event of a sharp change in trend or a deep correction. You can make a new deal after profit-taking, if a favorable trend develops.

How to Place Take-Profit Order

On modern trading platforms, you can set a take-profit order in several ways:

  • Indicating the price change of the instrument.
  • Setting the asset’s price level, which will allow you to make an opposite transaction.
  • Setting the profit level in monetary terms, after which the existing position is closed.
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Note: Not every exchange terminal supports placing take-profit order. On some platforms, you can only set the level or interval from the current price.

A take-profit order has the same properties on all trading platforms:

  • It can be set for positions open for both purchase and sale.
  • It is placed at the best current market price.
  • It is a limit order; it is displayed in the order book and executed at an equal or better-stated price.

Some platforms have restrictions on placing take-profit order, namely:

  • The minimum distance allowed from the opening price of the transaction (rarely).
  • The minimum distance specified in pips (points) from the current market price.

Some exchange software does not support placing a take-profit order; however, this does not mean that the trader cannot place these orders on his own. To do this, he must choose the profit-taking level, set a limit order that is completely opposite to the direction of the already open position.

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Note: Manually placing a take-profit order has many advantages over the built-in capabilities of terminals. Terminals allow you to automatically place a take-profit request only equal to the volume of the opened position.

Manually placing a take-profit order allows a trader to use several levels of volume division.

For example, a trader from the example above could create 10 orders to sell shares at $210, 20 orders to sell at $220 per share, so you can lock in profits starting from $210 per share.

How Can I Use Take-Profit Order and How to Choose Its Level Correctly

Take-profit order is mainly used by those traders who make short-term transactions. Making a profit is a mandatory part of such trading strategies as:

  • Short-term or intraday strategies.
  • Scalping.
  • Trading from support or resistance levels..

Each of these trading systems uses its own approaches to calculate profit-taking. Some of these approaches are universal; they can be used in almost any market situation.

Useful Tips for Placing Take-Profit Order

  • It is better to place a take-profit order next to strong support/resistance levels.
  • The profit level of the take-profit order should be at least three times greater than the acceptable loss Thus, one profitable trade can cover the losses from several unprofitable trades.
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Note: If the algorithm of the trading system provides for placing a take-profit order, then this is mandatory. In case of violation of this rule, you can incur significant losses or lose profit.
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