In the fast-paced world of trading, it is very easy to miss an opportunity to profit. Since everyone’s main motivator for investing is to make a profit, many traders take advantage of take-profit orders to lock in those gains if and when they arise. So, what does a take-profit order mean in the context of investing?

In a nutshell, it is the opposite of a  stop-loss order. With a take-profit order, you are setting the price at which your broker should automatically close your position at a profit. You are saying that, once the price of a security in which you have invested reaches a certain level, your broker should place a market order to exit that security immediately.

In this way, you do not have to concern yourself with making sure you execute a sell order manually when your position reaches a certain level. Rather, you are automatically selling when your position reaches a certain level of profitability regardless of that security’s underlying behaviour.

Example of a Take-Profit Order

It might be helpful to walk through a real-life example of a take-profit order.

Example: Let’s say you are entering a position on GBP/EUR at 1.1789. You might be expecting some volatility in this market from which you could profit. If so, you might set a T/P order at 1.1801 when opening your GBP/EUR position. During the following days, the price of GBP/EUR might fluctuate and at some point, it may hit 1.1801. It is important to note that you can set your T/P order at a specified percentage if this is your preferred way of monitoring your financial portfolio.

Once this happens, your broker will execute the T/P order and sell to close your position. Given the highly liquid nature of the GBP/EUR market, you should be able to lock in your profits quickly, before the price dips back down again. 

What is Take Profit Good for? 

While a stop-loss order is a way of reducing losses, a take-profit limit is a means of locking in profits. A few examples where a take-profit order could be beneficial include:

  • High market volatility: When the market is volatile and you can’t follow its movements on an hourly basis, a take-profit order ensures that you don’t miss your profit goal.
  • Clearly defined goals: If you have clearly defined investing goals, even if they are long term, you can use the take-profit option to make your investment and when it reaches those goals, you know the trade will be automatically closed.
  • Guard against emotions: When people see their investments going up, there is an inclination to hold on to an asset even after the investment goals have been reached. Sometimes this results in an investor never actualising his profits, since before he is able to sell it, the asset has fallen from its peak. The take profit option ensures that your emotions will not take control once the asset starts going up.