What is a take-profit?
Taking profit is essentially what we want to be doing each and every trade we take. A take profit is the place where we set our exit trade to get out of the market for a profit.
Similar to a stop loss, we should set our take profit trade at a predetermined place and not just a random point.
Newbie traders often make the mistake at aiming for a certain price level or a predetermined percentage gain.
These are just arbitrary levels and are not based on any sort of technical analysis and will almost certainly mean that you’re leaving money on the table.
Why is it important?
Taking profit is arguably one of the most emotionally and technically challenging aspects of forex trading.
People often struggle with taking profits early and seeing their trade run away on a huge move that they have now missed out on. This can really test even the best trader’s mental strength.
Mastering the art of taking profits is crucial for successful forex trading. If we get out too soon we could see our trade run away and we have missed out on profits.
On the other hand, if we don’t set appropriate take profit levels we could see our winning trades become losing trades if we have unrealistic targets.
Where to set our take profit trades?
There are many methods that we can use to take our take profit levels, here are a few of the most common:
- The key support and resistance levels
- MACD crossovers
- RSI overbought/oversold levels
- RSI divergences
- Use your predetermined risk rewards ratio (more on this in the next section)
Look for critical levels in the market that could prove as obvious obstacles. If you are in a long position, it probably wouldn’t be a good idea to set your sell order above a significant resistance point.
Every trade you take will present a delicate balancing act between being over cautious and being too greedy. To eliminate this, set your targets at key levels in the market that take out the subjectivity in your trades.
Multiple take profit zones
Some traders find it beneficial to spread out there take profit orders over two or more areas in order to take their profit incrementally.
This can really help with the mental side of trading as once you have reached your first TP (take profit) level your trade will remain in profit even if it dips below your initial entry point.
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This is usually more common in swing trades that are targeting larg pip movements over one to a couple of days. If you plan to do this then it makes sense to set the TP orders at or just before key levels in the market.
In the next section, we will look at risk-reward ratios that will help you to set better targets for your take profit orders.