What is Take Profit order in Forex Trading

2023.01.30 2023.01.30
What is Take Profit Order?

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

A Take Profit order is a type of order set together with Market Execution or Pending orders. It is used to place profit targets once the price level reaches a target price. Take Profit orders are executed automatically. This review deals with Take Profit orders and teaches you to place them on different platforms, use them in various trading systems, including complex instruments like trading CFDs, and calculate their levels.

Basics of a Take-Profit Order

There is Take Profit definition:

Take Profit (ТР) is a pending order that directs the broker to close a position once the asset’s value becomes equal to the value preset by the trader.

Let me explain the Take Profit order meaning:

It works as follows: the trader places an order to buy and buys an asset at its current price on the trading platform. He also sets a Take Profit order value at the current price + 20 points in the order. Once the certain price level reaches that value, the position will be closed automatically. A Take Profit order remains active until the market price reaches the preset value.

The trader can place Take Profit orders in the following situations:

• To open a trade if the trader is absent. For example, you suppose the price will reach a necessary level at night, but it might then have retraced to the previous level by the morning. So, you set a Take Profit order and go to bed. The trade will be closed automatically upon reaching the predetermined level. In the morning, you have your trade closed and take profit.

• To close a trade upon touching the level. This technique is often used in scalping, where even milliseconds matter. The trader supposes that the price line will reach a certain level and then pull back. He or she understands that closing a position manually might take too much time, and the price might go in the opposite direction too quickly upon touching the level. So, a Take Profit rate is set to exit the market with the most profit, and a position is closed automatically once the market price touches the predefined level.

• To observe a risk management policy and trading psychology. Emotions and greed can urge day traders to keep profitable trades in the market longer in the hope of higher profit targets. As a result, the trader misses a price reversal moment and closes the position at a less attractive price. Besides missed profit target, some traders feel bad about that. Take Profit orders do cut down prospective earnings, but they also protect you against reversal risks and reduce tension.

   

In Forex trading (foreign exchange), Take Profit orders are always placed above the Bid price for long positions and below the Ask price for short positions.

Attention! There are two prices in the market: Bid — sell price, and Ask — buy price. The Ask price is always higher than the Bid price. Forex trading candlesticks are formed as follows:

• High is the maximum Bid over a certain period.
• Low is the minimum Bid over a certain period. 

So, Min Ask will equal Low plus spreads, and Max Ask will equal High plus spreads.

The platform’s charts display only the Bid price as a default parameter in Forex trading. Remember to price in spreads when setting your forex trading TP order.

How Take Profit works. Take-Profit Order Example

A TP market order can work automatically at the preset level without the investor’s participation. 

How does the Take Profit order work? Here’s an example. Open the forex trading BTCUSD‘s chart. As our ultimate purpose is to see a take-profit order example, we’ll take a short M5 time frame in the foreign exchange. Open the take profit order window and set a target profit amount at 5 USD, which corresponds to 43,647.90.

Open the Forex trading position. Wait for the market price line to reach the predefined target price. The trade will close automatically upon reaching the Take Profit order value. Click on the trading history tab and check the closing price.

It is identical to the certain price specified in the order. That means the position has been closed automatically without delays or slippage by the trader’s order.

Take Profit Calculator

A Forex trading Take Profit Calculator is a tool that automatically calculates the Take Profit order amount based on the Stop loss amount, entry price, and the % of trades closed by TP/SL limit orders. In its turn, a Stop Loss level is calculated according to the risk management policy — trade volume, trade value, etc. 

Example. A trading strategy results in 70% of loss-making positions closed by Stop Loss and 30% of profitable trades closed by a Take Profit order. Thus, we have:

0.7 * Loss > 0.3 * Profit

However, for a foreign exchange trading strategy to work, the eventual total loss must be less than total profit. Thus, the Take Profit order must be at least 2.33 times (0.7/0.3) bigger than Stop Loss. Eventual slippages considered, the value should go up to 2.5 times.

Use Trader’s calculator to determine the best level to place take profit order at:

How to set Take Profit on LiteFinance’s platform

Attention! There are many strategies on the internet where Take profit levels and SL amounts are calculated for 4-digit quotes, and some calculators do that as well. For example, like on the site of Investing. At LiteFinance, the values are calculated for 5-digit quotes.

Here’s a guide to setting a Take Profit order on LiteFinance’s platform for beginner investors:

1. Register and open a real or demo account. Just click on “Registration” on the home page and follow the instructions. If you are registered, click on “Login” and enter your login data.

2. Click on “Trade” in the vertical menu on the left and choose your asset from the horizontal menu.

3. Click on “Closing conditions” to the right of the chart. Or, if your chart is extended, click on “Open trade” in the upper right corner and then click on “Closing conditions.”

You’ll see two columns in the window that opens: one is for Take Profit order values, and the other is for SL values. The Take Profit order column has three fields:

• Take profit. Here you can set a Take Profit order value in USD. For example, you want to make a trading profit of 20 USD. So, you enter that value in the field. Remember to allow for spread.

• Movement. Here, you can enter the number of take profit points. For example, you wish a TP order to trigger once the value covers a distance of 30 points (for 4-digit quotes). The screenshot shows a Buy order. So, we need to enter “0.00300” in this field.

• Close price. Here, you can enter a value the quote must reach for a TP order to trigger. Add 30 points to the entry price of 1.17180 and enter the value you get — 1.17480 — in this field.

   

When you’re setting one of the values in any field, the rest of the Take Profit rates are automatically shown in corresponding units in the other two fields.

Example. You wish to set 30 take profit points in the “Movement” field. That equals 300 take profit points for 5-digit quotes. So, you’ll have the following values in the other two fields:

• Take profit — 3 USD. In this case, we’re opening a position of 0.01 lots in the EURUSD. One point cost is 100,000 * 0.01 * 0.00001 = 0.01 or 1 cent. Three hundred points — 300 cents or 3 USD.

• Close price. Three hundred points will be automatically added to the trade’s current entry price.

   

To modify a TP value for an open position, click on “Portfolio” and then on “Edit.”

How to set Take Profit in МТ4 / MT5

The principle of setting Take Profit orders in metatrader is identical to the TP setting on LiteFinance’s platform. It can be set at the moment of trade entry point, or you can modify an open position. You can also move a TP order right on the chart without opening the order’s window.

How to set Take Profit for a long trade?

1. Click on “New order” on the chart. Choose a market execution order or a pending order — you can set a Take Profit level only as an addition to those two types of order.

2. Enter the level on which a long position must be closed in the Take Profit order window. A TP level must be more than the asset’s current value. A position to buy is opened at the Ask price, the higher market price marked as a red line on the chart.

How to set Take Profit for a short trade?

The procedure is identical to the previous one. The difference is that a short position is always opened at the Bid price, and the Take Profit order is always set below it.

If you try to set your Take Profit order between Ask and Bid values, you’ll have a system message that the TP value is incorrect and can’t, therefore, be set.

How to move Take Profit for a long position in MetaTrader

Two horizontal dotted lines are displayed on the chart after you open a trade in MT4.

1 — entry price level;

2 — TP level (for a long position, in the example above).

You can open as many orders as you wish on one chart. Not to confuse TP orders for different trades, the order number is indicated above the dotted lines, on the left. 

There are several ways of moving a Take Profit order:

You can move your TP order only in compliance with trading rules. You cannot set your TP level below the opening value for a long trade and above the opening value for a short trade.

How to set Take Profit in Quik

The procedure is identical to MT4. Specify “Take profit” as a type of stop order in the window for order setting and enter your value in the window that opens. In contrast to MT4, Quik sets Take profit as an independent order. So, you need to specify your position size, type of asset, client’s code, etc. You can also set a Take Profit order in Depth of Market (orderbook).

Where to set Take Profit?

How to set Take Profit correctly? TP calculation methods are subdivided into mathematical and graphical. The subdivision is conventional, and it would be difficult to say which method is better as much depends on the market situation. We’d better learn to use all of them.

1. TP setting based on key levels. Support and resistance levels are the areas where the trend is most likely to change its direction. The value will likely reach one of such levels, but whether or not it will break it out is unclear. TP orders fix profit targets before the price pulls back.

Such levels emerge due to psychological reasons. For example, most investors place TP on the level from which the value pulled down in an uptrend last time. TP is an order to sell. So, when all the orders to sell are triggered simultaneously, the market stops growing.

Example :

The H1 chart displays a long downtrend with frequent deep corrections. Three points allow drawing a horizontal level, which first serves as support and resistance levels, two times. One of the bulls’ attempts to break it out from below is unsuccessful. A new ascending correction has developed recently. It might end on the trend line or the resistance level. Those two points can thus be used for setting a TP stop order.

2. TP setting based on volatility. You need to know the candlestick’s average size that will determine price fluctuations on a smaller TF chart.

Example. The average size of an asset’s daily candlestick is 80 points in 4-digit quotes. The value has covered 30 points within five hours since the day opening on the H1 chart. That means it will have covered at best 50 more points within the rest of the day, and setting TP higher is unwise.

Useful articles on volatility:

3. TP setting by use of Fibonacci retracements

Correction levels are useful in swing trading strategies and short-term trading systems. Their underlying idea is that the value gets back to its previous levels and continues following its main trend after a market correction. A trade is opened at the correction bottom after a reversal clearly manifests itself. A TP order is set at the next level or the correction’s beginning.

Example :

The Fibonacci grid is drawn through extremums Fibo 1 and Fibo 2 in an uptrend. Correction goes to level 0.382 and almost touches it. In contrast to the previous candles, the red one has a small body and equal shadows in both directions. That’s a sign of a reversal. Open a trade on the current or next ascending candlestick. Set Take Profit on the correction’s beginning level — 0 as per Fibo grid.

When it comes to long-term trading strategies, use Fibonacci Extension. For more details on how to use indicators (MA, pivot points, etc.), check our review What is Fibonacci retracement? How to trade using this indicator?

4. Time-based TP setting. This way of setting Take Profit is appropriate to intraday strategies. Not to pay swaps, Take Profit can be set one hour before the day’s closure, for example. If the asset’s value fails to reach it, the trade is closed manually. This approach can also be used in news trading, just before important publications are released.

5. Using Trailing Stop. That is a type of protective stop-loss order, and it often replaces Take Profit limit order. Unlike TP, Trailing Stop doesn’t close a profitable trade. It follows the price at a predefined distance and stands still when the market price reverses.

The screenshot below shows how to set Trailing Stop.

A situation where several levels are superposed is called “Confluence”. If a strong level coincides with Fibo levels or a mathematically calculated point, that’s a good TP level.

6. TP setting based on goals or mathematical calculations. 

Trading should yield profits comparable to other alternative profit-making methods. If your goal is to earn 100 points in a day, TP for one trade should be 100 points, TPs for two trades should be 50 points each, etc. Once you hit your initial goal, you can relax and trade without TP orders, protecting your trades with Stop Loss to a breakeven level. The disadvantage of that method is that you don’t know the trend’s exact extent. The market price might not make it to a far TP goal. Or, on the contrary, a Take profit order might automatically close your trade too early when the trend is your friend.

A mathematical approach suggests considering a TP/SL ratio. First, you calculate your stop-loss position size based on position amount, leverage, one point cost, and high risk of losing money per trade in relation to your deposit size. Then, you calculate a TP amount. The most popular ratios in trading are 3/1 and 2/1. Take Profit should be 2-3 times bigger than Stop Loss. That theory is mathematically based, but you shouldn’t stick to it strictly.

Here’s some advice on TP setting:

• Don’t try to cash in on the whole trend. No one can say for sure when a trend will reverse. Locking in at least 60% of the profit will be a good result. To mitigate potential risks, it’s recommended to check your theories with technical indicators such as pivot points, MA, and other trend indicators.

Example. You “caught” the beginning of an uptrend. Having plotted resistance levels and analyzed longer time frames, you’ve concluded the value might rise by 100 points approximately. In that case, you’d rather set your TP at 60 points, not at 100 points. Or, you can close half the trade manually once you make 50 points and protect the rest with Trailing Stop.

• Don’t place your TP order exactly on the key levels: there can be many other traders’ orders as most people are inclined to stereotypical thinking. If your TP order is farther than most of the other TP orders, the asset’s value might reverse earlier than your order is triggered. Set your Take Profit below the key level for long positions and above the key level for short positions.

Take Profit is an order given to the broker, and it must be executed. A trade must close automatically once the market reaches the level set in a Take Profit order. However, there can be practical situations where a trade automatically closes at a worse price, or the order isn’t triggered.

The reasons for that are as follows:

• The absence of opposite volume required to execute the trade at a given value. For example, you have bought one lot and wish to sell it at a higher price. When the price rises to the predefined value, no one wishes to buy one lot from you. So, it can go down immediately after touching the level. The broker doesn’t know what to do next: it can wait for a new buyer who wants to buy one lot. It can sell a portion of your trade. It can request you for information on what to do. Such a situation is called “requote.” Types of order execution are determined by the trading platform and the broker’s trading terms. For example, МТ5 provides the following execution types: Fill or Kill, Immediate or Cancel, Return.

Check our review Difference between MT4 and MT5 – What is Better for more details on order execution types.

• The trader confused Bid and Ask prices and forgot about spreads. “I opened a short position, the asset’s value went three pips lower than my TP, and it wasn’t triggered. Why?”

Suppose you opened a position in the EURUSD at 1.17160 and set TP at 1.17110. A trade to sell is matched by a trade to buy, at the Ask price. The Ask price is always higher than the Bid price on the chart if the chart displays the Ask price. As a default option, charts display only the Bid price. The minimum Ask price equals the Bid price plus spread. If the spread is three pips, Bid must be 1,17107 for the trade to close at 1,17110 (Ask price). So, if your TP order is set at 1.17110, the chart will show the market price’s fall (Low) by three pips (spread) below that level.

• Trading conditions. Some brokers stipulate the following condition: a TP order is triggered only if the price has been on the order’s level for at least one second before it reverses. Otherwise, the order isn’t triggered.

• Gaps. Take Profit orders might fail to work if a gap occurs. If they work after a gap, that will be in the trader’s interests. If they don’t work at all, the trader should ask his/her broker why.

• Technical issues. Those are a broker’s fault in 99.9% of cases. Make screenshots when setting an order and contact the broker’s support team.

If you have already faced the incorrect execution of limit orders, leave a comment, and we will look into it together.

Take Profit strategies

We have already examined what TP orders are and how they are calculated and set on LiteFinance’s platform, МТ4, and QUIK. Next, we will have a look at two practical strategies of using TP limit orders.

Trading with TP in the direction of the trend with plotting of key levels

The trading strategy is based on following the trend line. Support and resistance levels are used as auxiliary tools.

The order of actions:

1. We can see a downtrend and recurring corrections on the H4 chart. The S1-R1 segment could be a new uptrend, but according to the Elliott Wave theory, at least three waves and two corrections must develop to put an end to the downtrend. There isn’t enough information to enter the market in the uptrend.

2. The downtrend includes a highly volatile flat range. Plot L1 and L2 levels through support and resistance levels R1, R2, S1, S2, respectively.

3. The asset’s value forms the Double bottom pattern, through which L4 level is drawn. By the time the pattern had formed, there wasn’t any clear trend reversal signal. Though Double Bottom is a reversal pattern, that could be another flat segment. So, it’s too early to open a trade.

4. An uptrend begins. Draw L3 level through local highs and lows. Open a trade if the trend line and L3 level are broken out.

5. L2 and L1 levels are target points for placing Take Profit. In the first case, the position would yield nearly 70 points in 2-2.5 days. In the second case — almost 185 points within 9 days.

That’s a long-term trading strategy, so consider swaps, too. It suits traders whose experience goes beyond basic knowledge. The average daily profit is 20-30 points. The chart should be analyzed and controlled every 4 hours. To form a fully-fledged trading system, add some trend technical analysis indicators to this trading strategy. For example, Alligator, pivot points, or moving averages.

TP setting by use of channel indicator

In this strategy, a trade is opened when the channel is broken out. The TP amount is quite small here. The market price moves within the range most of the time. When the market meets a crucial fundamental factor or a big capital, it breaks out the channel limit and moves on under its inertia for a while. We can cash in on that market reaction.

Initial data:

• Time frame: М15-М30. The market inertia doesn’t last for long, and using it in the short term is easier. 

• Financial instrument: any currency pairs.

• TP amount: 30 points for 4-digit quotes. A TP limit order is placed using the mathematical method. Key levels are not important here. To make a substantial profit, open a trade of at least 0.1 lots. An efficient trade should yield at least 30 USD.

• Indicators: Keltner Channels and RSI.

The main signal: the candle closes 50% beyond the channel limits. Confirmation signal: the RSI moves to the overbought or oversold areas for long or short positions, respectively, on the signal or previous candlestick. Open a trade and add 30 points in the TP order window.

Example.

There’s a signal to open a short position in both cases. The RSI moved to the oversold area, and the red candle closed outside the channel limits. Approximate TP levels are shown on the chart. However, as that’s a clear downtrend, it would be wise to delete TP once it’s triggered and protect the trade with Trailing Stop.

Check out our review Keltner Channel Indicator for more information on the strategy and the indicator.

Pros and Cons of TP Orders

Take Profit is a type of protective order. If you need to be out, just set TP at the level the price will reach for sure in the future performance, and don’t worry any longer. Profits will be locked in automatically.

TP pros:

• You can leave your trades uncontrolled for a while. TP orders are helpful in medium-term and long-term strategies. They are also appropriate to trading in several assets where the trader needs to control several charts.

• Control over emotions. You don’t know when quotes will change their direction. When setting a Take profit order, you can control your emotions so that greed doesn’t take over. Thus, you won’t miss something more important while running after a bigger profit target.

Using TP orders is recommended to beginner traders. Take Profit should be placed before opening a position and not corrected before closing a position. As long as a trade isn’t open, the trader is more focused and cold-blooded.

TP cons:

• Missed profit target. TP orders automatically close a trade, whereas it can continue yielding profits as the value moves on in the predicted direction. Opening a trade again involves spread-related expenses.

• It’s hard to use TP in scalping in the short term. Even seconds count in scalping. There’s no time and sense in placing TP orders as trades are almost always closed manually.

• It’s hard to use TP orders during high volatility periods, for example, when fundamental stats are released. A drastic price fluctuation in either direction can trigger a TP order placed too close. Opening a trade again involves spread-related expenses.

Take Profit orders are often used in M30-H1 strategies and trend markets. Placing TP outside flat ranges is rarer. An example of that strategy is provided in the review Sniper Forex Trading Strategy.

Pros and cons of Take Profit

Hope we figured out what is take profit in Forex trading and know why should we use it how to use it correctly. If you have any questions, ask me in the comment section below.