Take profit is a special type of limit order that allows a Forex trader to close a profitable trade at a certain price. Limit orders are automatically executed when the market hits the price that was pre-determined by a trader. A take profit order is executed at a better price when the market goes in favour of a trader. Take profit orders are usually created alongside typical market or entry orders such as stop loss orders to define the risk-reward ratio a trader is willing to take. In a nutshell, a take profit order allows a trader to limit their exposure or risk to the market by closing a trade as soon as it reaches a favorable price as opposed to staying longer when there is uncertainty that the price may rise further.
Placing take profit orders
Limits are usually set when trades are in profitable territory. The orders are set with the sole purpose of protecting profits. It’s very easy to place a take profit order. All you need to do is go to the advanced options provided on an open trade to set a take profit order. A take profit order specifies the exact rate and/or the number of pips (from the current position) you want to close out your current position from. The specified rate is usually referred to as the take profit point.
Forex brokers offering Forex trading services to retail traders usually have user-friendly Forex trading platforms that allow you to place take profit orders. Since the Forex market can be a very volatile market, fluctuations can easily wipe out profits. The importance of protecting profits can’t therefore be overemphasized in Forex trading. When the pre-set limit of a take profit order is hit, the order closes out a profitable trade automatically realizing the gains in your account.
It is also possible to modify your take profit order or delete the order altogether. Take profit orders are usually used by traders who want to wait for sometime before closing out profitable trades. The traders are usually unavailable to constantly monitor their open positions hence the need to place a take profit order. The traders are usually willing to risk a portion of their gains with the hope that they will still make more pips while they are not monitoring the market. They are however open to the notion that the trade can turn against them so they take the necessary measures.
If you long EUR/USD at 1.3999 and you want to close the trade at 1.4050, you can set this rate as your take profit threshold. When the EUR/USD reaches this target, your open position will be automatically closed securing your profit in case the currency pair moves downwards after reaching this price.