What is: Take Profit Order

What is Take Profit Order

A Take Profit Order is a type of limit order that allows traders to set a specific price at which they want to take profits on a trade. This order automatically closes the trade when the price reaches the predetermined level, locking in profits for the trader.

How Does Take Profit Order Work

When a trader enters a Take Profit Order, they specify the price at which they want to exit the trade with a profit. Once the price reaches this level, the order is triggered, and the trade is automatically closed at the specified price.

Benefits of Using Take Profit Order

One of the main benefits of using a Take Profit Order is that it helps traders to avoid emotional decision-making. By setting a predetermined price at which to take profits, traders can stick to their trading plan and avoid making impulsive decisions based on market fluctuations.

Limitations of Take Profit Order

One limitation of using a Take Profit Order is that the price may not always reach the predetermined level before reversing direction. In such cases, the trade may be closed at a lower profit than anticipated, or even at a loss if the price moves against the trader.

How to Set Up a Take Profit Order

To set up a Take Profit Order, traders need to specify the price at which they want to exit the trade in their trading platform. They can also choose to set a trailing stop on the order, which allows them to lock in profits as the price moves in their favor.

Examples of Take Profit Order in Trading

For example, if a trader buys a stock at $50 and sets a Take Profit Order at $60, the trade will automatically close when the price reaches $60, locking in a $10 profit per share. This allows the trader to take profits without having to monitor the trade constantly.

Conclusion

In conclusion, a Take Profit Order is a useful tool for traders looking to lock in profits on their trades. By setting a predetermined price at which to exit a trade, traders can avoid emotional decision-making and stick to their trading plan.