The take profit and its use in the stock market

When trading online, money management is an essential part of any strategy and aims to minimize risk and maximize profits. In addition to a good command of the markets and a careful analysis of trends and available assets, there are various tools available on trading platforms to help you do this, including the "take profit" order, which we will discuss in more detail here and which will be used to close your position at the best time.  

77% of retail CFD accounts lose money. You should consider whether you can afford to take the high risk of losing your money. This is an advert for trading CFDs on Plus500
The take profit and its use in the stock market

What is Take Profit?

The take profit is an order that is used either in the Forex market or in CFD trading. It is used to automatically close a position when the price of a security reaches a pre-determined level. The price at which the take profit will be triggered is of course higher than the price at which the position was taken.

As you may already know, the take profit is often associated with another counter-order, the stop loss. The latter will have the same function of automatically closing the position, but its purpose is to limit losses and not to guarantee a take profit.

Indeed and as its name indicates, the take profit has above all for objective to allow you to take the profits in time if the price of your asset evolves in your favour. This take profit can be expressed in points or percentages depending on the method chosen by the trader. Thus, once the price or the percentage of the asset's price evolution is determined by this take profit, you don't have to do anything else because your position will be closed automatically when this objective has been reached.

 

When to use a Take Profit order and why?

Using a take profit order when taking a position on an asset online first of all gives you more freedom and avoids you having to stand in front of the charts all day in order to close your position manually. However, you should keep in mind that this order will be executed even if the price of your asset continues to move in the right direction.

The use of take profit or stop loss is however very advantageous because it allows to manage risks in an efficient way and this is the reason why these orders should not be placed randomly. To determine the level of these orders, it is necessary to evaluate the risk/reward ratio of a position. It should be noted here that there are also partial take profit orders that allow for increased profits in the event of a favourable market development after the defined price.

In particular, we recommend the use of take profit in the case of markets with a weak trend and with the aim of guaranteeing the cashing in of profits. In the case of markets with a strong trend, the take profit can make you lose some opportunities of bigger gains and will be less judicious.

 

How to determine a good take profit?

As you will have understood, the take profit is very interesting if you manage to determine its value or percentage in an optimal way. However, this exercise is more difficult than it seems. The level at which you trigger this order depends on your risk appetite and your trading strategy. However, it is important to note that your decision should be based on a good technical analysis of the market.

More concretely and to determine an optimal take profit, we will base ourselves for example on the signs of technical supports and resistances which are zones of stabilization of the prices. Thus, traders who have taken a sell order generally choose to place their take profit just above the support line. If their order is to buy, they may place that order just below the resistance line.

It is of course also necessary to use other chart indicators such as Fibonacci levels to validate or invalidate the trend you have identified.

 

Some tips on how to use the take profit in the best possible way:

To conclude this article, we offer you a summary of tips to follow if you want to set up and use an effective take profit strategy:

  • Firstly, if you are one of those traders who tend to be influenced by their emotions, a take profit strategy will be useful and will prevent you from changing your mind or doubting your strategy. After having made a good calculation of the risk/reward ratio of your position, you will be able to set up a stable and reliable strategy that the take profit order will guarantee you to follow. This type of order allows you to stick to your initial strategy, while keeping an eye on the market elements that could affect it.
  • Although it is possible to change the take profit level once you have opened your position, we also advise you to be consistent and only change your target if reliable data suggests you should do so or in the event of an unexpected market event.
  • As mentioned above, the level at which you are going to place your take profit should be calculated reliably with methods based on a good technical analysis of the traded security.
  • You can also use the price alert systems when you have placed this order to avoid having to follow the charts in real time. These alerts can be placed anywhere you like.
  • Finally, don't forget to do several trials and different experiments and attempts using the take profit at different levels. This will undoubtedly help you find the optimal level of profit taking for the asset you are trading.

Frequently Asked Questions

What is a stop loss order compared to a take profit?

The stop loss order is very similar to the take profit order and is often used simultaneously with the latter. However, the stop loss order is different in that it aims to limit risk by cutting losses. When the trend does not evolve in your favour, it will close your position before your losses are too great. It is therefore an important safety feature that you should use to the maximum.

What is the best level of take profit?

It is not possible to determine with certainty an optimal take profit level. The choice of this level will depend mainly on your forecasts, your analysis and your type of trading, i.e. your strategy and your appetite for risk. However, it is advisable not to set the take profit too high as this could cause you to miss out on an interesting profit opportunity. One rule to follow here: Don't be too greedy!

Can fundamental analysis be used to take profit?

A take profit strategy is essentially based on technical analysis because it is very difficult to place an order of this type based on one or more fundamental data. This does not mean however that you should neglect this analysis because any fundamental data that appears once your position is open can call into question your strategy and you must then be reactive and why not modify your take profit level according to it.

77% of retail CFD accounts lose money. You should consider whether you can afford to take the high risk of losing your money. This is an advert for trading CFDs on Plus500