A take profit order is a standing order put in place by traders to maximize their profits. It specifies a certain price above the purchase price, which is chosen by the trader. If the price of a security reaches that limit, it will automatically trigger a sale. If the price does not reach that limit, the order is not acted on.
A take-profit order is a short-term trading strategy. It is useful for day traders who want to take advantage of a quick rise in the cost of securities to make an immediate profit.
Why are Trade Exits so Difficult?
There are two main reasons why trade exit strategies are so difficult.
The first reason is because many people think of them as the same as trade entries, just in reverse. The logic here is that a good long entry is the same as a good exit from a short trade. This is not really true, because we are usually looking for different things in our trade entries than we are in our exit.
You can have a brilliant trade idea, but if you choose a TP level poorly, you won't get as much profit as you could have.
Every trader should know how to place Take Profits. There are several strategies on how to do it.
1. SUPPORT AND RESISTANCE
If you look at the chart, you will notice that usually, a price struggles to break support or resistance. More often after the struggling the price reverses and moves in the opposite directions. So, levels of resistance and support will help you to set really good TPs. That is why this strategy is the most popular among traders.
2. Understanding the peaks and troughs of Fibonacci trends.
Fibonacci extensions can give you an idea behind a stock's profit potential based on how far its trends extend.
3. Placing them based on the moving average.
During trending market periods, some traders will also place a take-profit order in and around the price of the moving average, particularly when a stock has dipped well below its medium-term moving average.
4. RISK/REWARD RATIO
When you set a Take Profit, you should take into consideration a Risk/Reward ratio. This measure shows how much profit a trader anticipates in exchange for a risk of a limited loss. In general, the best ratio is 1:3, so the profit should be 3 times bigger than the loss. For example, if your Stop Loss equals 50 pips, the Take Profit should be 150 pips.
In some cases, other Risk/Reward ratios are possible. For example, if you trade on a break of a level, you may use 1:5 ratio as the possibility of a false break is high and you might want to protect yourself more.
5. Moving average crossovers also serve as take profit signals for some traders.
This tends to be a favorite of the longer-term trader, as it is a trend-following system. This approach allows for large areas for the Forex market to move around in, allowing you to stay in the trade for much longer periods of time. Depending on the timeframe that you are using, this can be months or even years believe it or not.
The easiest way to learn about these market orders and execute them with confidence is to follow experienced traders that know what they are doing.
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