What is a Take Profit and How Does It Work?

2023-05-29

Summary:

Understand take profit in trading, how it works, and how to use it to manage trades and maximize profits.

A take profit (TP) is an order that closes your trade once a certain profit level is reached. When your take profits is triggered in the trade, your trade will be closed at the current market value. Therefore, take profits are sometimes referred to as limit price orders.

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Take profit are typically paired with stop loss orders, allowing you to define your risk-return ratio. A trading order with an appropriate risk-return ratio, compared to your trading strategy, can propel you further in the market and determine your success. Take profit function to exit your position when prices reach favorable levels, thereby limiting your risk exposure and managing risk effectively.

Usually, the shorter a trader's strategy, the better their take profit orderly. A popular strategist uses key points or average real range to help define the appropriate level of profitable orders. When short-term traders do not have a profit target, they may quickly see that they have not reached their desired profit level because they do not have a good understanding of when to exit the market.

The preferred strategy for intranet earnings targets is to use the average actual range plus the extreme value of nighttime fluctuations. Another better choice is to have daily or weekly pivot points.

These levels are usually relatively extreme, and if the market reaches this level, there may be a pullback, and an exit at this time is advantageous.

Should you use a take profit orderly?

Although each trader may have different risk profiles and trading times, you can determine whether to use take profit by asking some key questions.

Firstly, if you are a volatile long-term trader, you may want to leverage longer-term trends. When they realize there is a good trend but leave too early, traders who use take profit often suffer setbacks. This situation may occur.

Although the market may vary, take profit are usually the preferred choice. This is because resistance levels usually hinder price increases, while support levels hinder price declines. Therefore, in a limited market, if you buy at a low price, you usually encounter resistance levels during the price increase process. Therefore, before approaching or falling below your entry point during the market return process, you need to set a take profit at a price above cost.

Indicators to Help You Decide When to Use Take Profit

There are many indicators that can help you see when a trend can take effect, such as Moving Average or relative intensity indices. However, the preferred direction for new traders is ADX (Average Orientation Index), which reflects the degree of change in orientation rather than the direction itself. Its range is from 0 to 100, and a level above 30 indicates a positive trend, in which case it tends not to use take profit.

If the ADX index is below 30, then it means that the market has a range, and in this case, take profit may be much better than simply trading in the market, and trying to exit at a "feel right" time.

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