What is a take profit order?

The take profit order plays a key role in the strategies of many traders and is used with a variety of assets, from stocks and foreign exchange to cryptocurrencies. When prices start to rise, orders serve as an upper limit and ensure that assets are sold before prices begin to fall again. Imagine that a poker player knows exactly when to leave the table. Then, instead of continuing the game, risking losing the winnings, he ends the game and remains with the money. This is how take profit works.

The opposite of a take-profit order is a stop loss limit, also called a stop limit. It triggers the sale of shares when prices reach a predetermined low point. This helps traders cut losses and protect themselves if prices continue to fall.

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How does a take profit order work?

A trader usually chooses an activation price for his take profit order based on technical analysis. They rely on charts that show the performance of stocks or foreign currencies over the past day or week. Typically, these orders are used for short-term trades as they can significantly reduce profits when a trader has opted for a long-term strategy.

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What is the use of take profit?

A take-profit order helps to avoid emotions when trading. When opening a trade, you can safely choose a price at which you are ready to exit it, instead of giving in to emotions and selling assets too early or too late. They also save traders the trouble of manually selling their stocks and constantly monitoring prices throughout the day.

Cons of the take profit order

Although a take profit guarantees a profit, it is quite possible that the order will be filled and prices will continue to rise. Accordingly, you may miss out on more significant profits. There is also the potential for human error, so always make sure your settings are correct to avoid costly mistakes.

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What is a stop-loss order?

Stop loss orders allow traders to automatically sell their stock if it falls below a certain price. They help prevent losses when the stock markets are down and also eliminate emotions in trading.

Example of Stop loss orders

Let’s say you bought Amazon stock for $1,900 and you’re worried that prices might start to drop soon. In this case, you can set a stop-loss order, which will lead to the sale of shares as soon as their value falls below $1850. While there is no guarantee that you will receive this price from the buyer, your shares will be sold at the next accepted market price.

Now let’s say you didn’t set a stop loss and Amazon stock dropped to $1600 before you sold it. This would mean a loss of $250 per share.

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Stop Loss Order: Pros and Cons

Stop-loss orders allow investors to think ahead about the price they want to sell their shares at, preventing rash and potentially unprofitable decisions. Such an order also relieves shareholders of the need to constantly monitor changes in the market. Selling action will automatically occur if prices fall to a pre-set level.

However, even such useful tools are not perfect. If Amazon was about to release disappointing financial results after the markets closed, and the stock was trading at $1,750 the next day, you’d be down $100 more than you’d be prepared to lose.

Also, stop-loss orders do not take into account when prices rise. If prices on Amazon temporarily skyrocketed to $2,500 and then returned to $1,850, you wouldn’t make any profit. A trailing stop order would work well here. With its help, it would be possible to make the sale price rise in proportion to the growth in the value of shares. If you set a trailing stop order of 10%, this means that your Amazon shares will be sold when they drop 10% from their last high. The sell would then have occurred at $2,250, which is $400 more than if you were counting on a simple stop order.

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