Take Profit: manage trading risk
Published: 6 November 2020 by Andrew
Trading on Forex or any other financial market requires different knowledge, but above all the ability to maintain control over your investment capital. Only those who are able to minimize the risks they run during the negotiation phase can maximize profits. One of the tools to do that is Take Profit.
In order to teach all the managerial and micro-managerial aspects of online trading to our readers today we really want to consider this as a tool that can maximize profits and bring them in the safe at the most appropriate time.
Those who have made trading their profession spend most of their time identifying the best market entry signals, market trends and the performance of the most interesting assets.
Traders must therefore certainly develop strong analytical skills, but then once opening positions that bring profits it is also important to understand when it is time to close and take home the accrued returns.
Making sure this result can be done with Take Profit, a tool that we will discuss extensively in this guide. However, it must be remembered that only some of the online trading brokers allow setting orders such as take profit in the best way.
We will see them later. Before starting, however, it is advisable to point out, especially to beginners, that it is possible to do automatic trading by copying the best traders in the world.
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Take Profit: what is that?
For trading insiders, when we talk about Take Profit we mean closing a positive position when it has reached its maximum maturity.
The Take Profit order can be used on any type of market, but it has become famous above all thanks to trading on Forex. Here, due to the high rate of volatility, it is essential to know when to exit the market with the “booty” accrued to its fullest potential.
It is called an order because it is an automatic setting established by the trader that allows you to automatically close a position when market levels reach a predefined price quote.
To give an example, the Take Profit is a limited order in quantity to the single initial position that has been opened on an asset. It must be set in the direction in which you think the market will move.
Therefore, it is a very useful order and to be used every time the price moves in the direction chosen by the trader for their investments. If not, when the market moves in the opposite direction you can set a stop loss order.
How it works
Trading professionals never miss an opportunity to set the Take Profit and they do so to ensure that the profits made are retained when prices move in their favor.
Take Profit is expressed in Pips or as a percentage of the entry price. For example, if the trader calculates that the value of the EUR / USD pair can grow by 8% then he will have to set the stop loss accordingly.
In short, after carrying out the market analysis, traders are very often able to establish what the change in the price of the asset might be in their favor. Once this data has been established, the stop order is set in order to close the transaction and move on to the next once the profits have been collected.
In our example, therefore, the trader will have to set the stop loss at an 8% change in the market price, so the change will have to be 8% up or down compared to the current price, again based on the trader’s estimates.
Read also: Bollinger Bands
Trading Risks – Benefits
At the same time the trader must also set a Stop Loss, in this case, however, lower limits are set. In fact, the losses must always be limited much more than the profits that can be let run out of proportion. The stop loss, better to set it at 5% maximum.
In fact, when opening new operations it is essential that the trader make an analysis of the risks and benefits. If an operation is expected to yield less than 5% of what you are risking, then perhaps you need to reconsider or even avoid it.
A risk-benefit ratio of 5: 8, on the other hand, can be tempting and can easily push the trader to start the operation.
Read also: Panic Selling.
Take Profit, why is it so important?
One of the great advantages of setting limit orders is that they give the trader more freedom in managing his time and day.
During the day, a trader who has set his Take Profit and Stop Loss properly, can also devote himself to other operations and analyzes without necessarily being attached to the charts relating to old operations.
The trading platforms available online today such as ForexTB, offer the possibility to set limit orders which are then executed automatically every time the market moves in the direction of the predetermined price share and touches it.
Obviously, orders like Take Profit have the problem of also limiting the profit itself in a certain sense. The market may still move in favor of the trader’s position even after the Take Profit has taken effect and the position has been closed.
However, it is always a good thing to take home the accrued profit because the markets are still very unpredictable and it is difficult for a trader to understand if and when they will turn against him by breaking down the profits accrued.
Read also: Forex Quotes.
Take Profit to manage the risk
In truth, in the field of trading the Take profit tool is seen and used above all as a way to protect yourself from trading risks . Therefore, the values chosen for both take profit and stop loss orders must never be random.
Each trading operation is independent from the others and for this reason the best strategy is to optimize each investment as much as possible to make sure that it acts as a driving force for all the operations that will follow, accruing an ever greater capital.
Precisely on the basis of what has been stated, it is essential to choose your risk / return ratio well before opening any market operation. An experienced trader uses orders as partial take profits in order to increase profits and reduce opportunity costs (as Expert Advisors also do).
Especially in markets that do not have a strong trend and move weakly it is necessary to ensure that profits are collected whenever possible. On the other hand, in markets with important trends the cost / opportunity ratio could be too high and it is therefore advisable not to rush to define a take profit.
Setting the Take Profit: techniques
Unfortunately we cannot say that there is a unique way to set the Take Profit, this type of order is still largely discretionary and linked above all to the propensities of each trader.
Above all, the propensity to risk is the parameter that most influences the definition of the limit order. For example, if a trader has a low risk appetite he will tend to establish the Take Profit on very low percentages of possible return (5-10%).
Otherwise, for all those traders who have a strong propensity for risk, they will tend to go even further, even touching 15 – 20% of potential profit. Despite these variations in the choice parameters, there is a fact that always remains true, namely: you should never set the Take Profit randomly.
Especially traders who use derivative instruments must absolutely base their decision on the technical analysis of financial markets, a discipline that helps traders make informed choices and avoid haphazard organization of their trading activity.
There are some fundamental data that should always be taken into consideration before defining the Take Profit, here are some examples:
- Market structure
- Asset Volatility Data
- Candlesticks analysis
- Analysis of graphic models
With all these elements at your disposal it becomes much easier to make correct predictions about the next levels that the price could reach. From then on, setting up stop orders really becomes a breeze.
Take Profit with Support and Resistances
One of the most used methods to set up Take Profits is to rely on Supports and Resistances. The support and resistance lines are areas where the price trend tends to stop and not continue its run up or down.
Prices stabilize here and it becomes much easier to find the most appropriate point to set your limit order. For this reason, a technique that can be used is to identify at least two minimum levels on the graph and draw a line between them, this in the case of a support.
Similarly, a line can be drawn on two points of the maximum reached by the price and thus display a resistance. Once this is done to set the Take Profit you can choose a point a few pips above the support or below the resistance.
Read our guide to supports and resistances here.
As always, however, it is not necessary to take the data of a single indicator, even if is reliable as supports and resistances, it is necessary to confirm the data collected also with other indicators, such as the RSI Oscillator, the MACD or the Moving Average.
Trading with Take Profit: the platforms
Now that you understand the importance and relevance of setting take profit orders, you may be wondering on which trading platforms it is actually possible to trade using orders of this type.
In fact, in the negotiation phase it is essential to have a platform on your side equipped with all the comforts and all the technical needs such as limit orders and technical analysis tools.
The Take Profit is certainly a very popular order on the major trading platforms. However, many beginners don’t know it and don’t even know where to look for it when on a trading platform.
Would you like to learn all about this fundamental order of trading? Then the best resource you can draw on is definitely a comprehensive trading course. For us, right now, among the very few courses in circulation, ForexTB is certainly among the best. Let’s go and introduce it.
ForexTB course: everything on Take Profit
The best resource to learn a lot, not only about take profit, but also about all other trading orders and trading in general is definitely the ForexTB course: you can find it here where you can download it completely free.
The ForexTB manual is offered by the broker in eBook format and contains the knowledge of leading traders who have collected important educational material to create the manual.
The interesting aspect of this manual is that despite being written by professionals it is very accessible for those who are beginners and have yet to learn the basics of online trading. In short, with this course you can learn a lot and also easily.To download the ForexTB course for free, click here now.
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Above, a complete list of the best brokers for online trading. They are all simple brokers to use, even for a true beginner, safe and free (there are no commissions or costs to pay).
Take Profit Order Types
Let’s continue our Take Profit guide talking about the types of orders that can be set. In fact, you need to know that there is the standard Take Profit which is what we have talked about so far, then there is also the Partial or intermediate Take Profit.
What are the advantages of this type of Take Profit?
- It allows you to secure gains by climbing as the market moves in the intended direction.
- When the volume of trade is reduced and the prices begin to move in an unexpected direction the loss on the profits already accumulated is reduced.
For a professional, using partial take profits is a way of securing profits rather than making them grow out of all proportion. So this type of order is best used if you don’t have a strong propensity to take trading risks.
Read also: Living by Trading.
In the course of our guide we have shown you the potential of Take Profit and how this simple order can help you control and maximize profits at the same time. These are fundamental concepts for those who want to learn how to invest: we can say that it is one of the bases of trading, in addition to money management.
Setting a good take profit may seem simple, but if you don’t use the right technical analysis tools and don’t evaluate your risk appetite then it will be difficult to understand the best point to set it.
For traders who want to know more about Take Profit and how to use it, the ForexTB broker guide can be very useful.
You can download it for free, just click here.
This is an integrated tool in the trading platforms that allows us to establish the level of earnings where the position is automatically closed.
Its main function is to protect profits, protecting us from price fluctuations or trend reversals.
When executing the order, it will be possible to enter the Take Profit level at the same time.
Yes, just click on the position and then on “edit” to enter the TP level.