Some forex trading tools are critically important for traders to master these before they can move on to more complex concepts. One of the most important tools every trader must know is the take profit order. In this article, we shall learn what a take profit order is and how they can be used to maximize your returns.
Take profit orders are used by traders to force trades to close automatically when profit reaches a certain predefined level. For example, a trader buys a currency pair EURUSD at 1.1750 and sets take profit at 1.1760, the trade is closed and profit is secured when the currency pair reaches the 1.760 price level. Take profit orders execute automatically, meaning that traders don’t have to monitor the market constantly for the right time to exit.
When you set a take profit order you’ll usually also set a stop loss order. This acts in much the same way as a take profit order, except is designed to reduce your potential losses if the market doesn’t in a profitable direction. We study stop loss orders in more detail here.
Take profit is a key tool for forex traders because it ensures that profits are secured in case of a sharp market reversal. The Forex market is very volatile, and trades can quickly switch from profit to loss within a few minutes. The take profit tool is often used alongside fundamental analysis tools like the average true range which can help to determine entry and exit points for a trader.
Take profit orders are always set in accordance with your trading strategy. Firstly, take profit orders can be opened long or short, depending on the order you’ve placed. If your strategy is based on the market moving significantly, you should set your take profit at a higher level. If your fundamental analysis strategy is to take profit before the market turns, set your take profit closer.
It is a misconception that taking profit in a short time enables them to beat the market and ensure they maintain a positive capital. This is often not the case. Many traders’ take profit levels are set too close to the opening price, and the traders often fall in into occasional losses. Ultimately, It is important as a trader to learn the principles of money management in forex trading to ensure stop loss and take profit management that leads to an overall winning strategy.
Support and resistance levels are also important when deciding where to set your take profit level. The analysis of market highs and lows and high impact areas determine the market direction and when to take profit. A fundamental take profit approach is to is to take profit ahead of high impact price levels. It is important to focus on major price levels and not to be too scared of horizontal lines.
In this article, we have learnt how to effectively use take profit orders. Learning the right time to take profit takes a lot of practice and even professional traders occasionally miss out. However, with constant practice, the fundamentals can be mastered.
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