While a Forex take profit order isn’t nearly as important as a stop loss order, it is still very useful.
what you need to know below.
A take profit order is simply an order to exit a position (close a trade) once price has moved in your favor a predetermined amount.
For example, let’s say you buy a currency pair at 1.1650 and set a Forex take profit order at 1.1700.
If price gets to that level your trade will be automatically closed (at a profit).
In this way, you ensure you get profits before a move peters out.
This is especially important if you won’t be around your trading desk.
While we’re talking Forex, this type of order exists in other financial markets as well.
But we are talking Forex, so let’s see some tactics.
Now that we know what a Forex take profit order is, it’s time to look at some good tactics.
We just mentioned the usefulness of a take profit (TP) order (or just TP, take profit) if you won’t be around your trading desk, but what about other uses?
Even if you are at your trading desk and you know what you’re doing, it’s incredibly important to have a clear take profit target.
Imagine the following scenario.
You want to enter EUR/USD in a long position. You’ve done your homework fundamentally, sentiment-wise, and you think price is at a good technical level.
You also know where to place your stop loss in order to give this trade appropriate room to breathe.
But you plan to hold this pair for two or three sessions, since you believe sentiment is strong in your favor.
You enter the trade, and it goes well.
Price goes up and up, but when should you close?
A sharp individual would say: when the initial favorable conditions change.
And that’s completely right.
However, such conditions may not have changed, and price could still have reached a standstill.
Essentially, price already got so high, traders aren’t likely to continue buying unless a new, stronger reason pops out.
In this fashion, you trade just got to a powerful resistance zone.
When you checked technical levels before entering this trade, you should have seen this (and you probably did).
As such, this technical zone would have been a great pointer to where you should have placed a take profit order.
Since price was likely to stick to that zone, and go no further, placing a take profit order just before that zone would have closed your position with a hefty profit.
But we can exit the trade manually at that point, no?
Yes you can, but how do you know that’s the best place to?
What I’m trying to get at is the fact that:
Having a take profit target before placing the trade forces you to see your risk/reward.
Because checking for the technical levels which will make for good Forex take profit targets will allow you to compare them to your stop loss technical levels.
Essentially, if your stop loss order is 100 pips away, and your take profit is 40 pips away, your risk/reward ain’t that good.
Now, if the trade has a lot going for it, you can still decide to do it (since its much more likely you’ll get those 40 than lose 100).
But it is very important that you know this before you place your trade.
Thus, a Forex take profit order is very useful if you’re trying to take your trading to the next level.
A Forex take profit order becomes more important if you’re day trading or scalping.
Price could get in and out of the “best” place to exit your trade. And it may not get back to this zone during the session in question.
As such, it is important you prepare a take profit target before executing your trade, even if you decide to manually exit the trade.
Though in many ways, it’s better to enter a trade manually and exit it automatically, since doing this reduces your risk. Why?
Manual entry forces you to check what’s going on (has anything changed?) before placing the trade.
While an automatic exit (stop loss or take profit) reduce your exposure to market whims regardless of your mood (or whether you’re not at your desk).
Hope this was informative,
The Forex Economist
Sep 12, 17 09:09 AM
Learn what you need to know about Forex audio squawk here.
Sep 11, 17 09:48 AM
GBP (pound) traders what can you expect from the Bank of England's MPC vote this Thursday, Sep 2017? Click to find out.
Aug 21, 17 04:41 PM
Three of the eight major currencies are commodity currency. But what is that? Which are those currencies, and how can we trade them? Click to find out.