Take-profit order definition
What is a take-profit order?
Take-profit orders play a crucial part in many trader’s strategies – for everything from stocks and foreign currencies to cryptocurrencies. When prices begin to rise, these orders serve as an upper limit – ensuring that assets are sold immediately before prices begin to fall again. It’s almost like knowing when to leave the table when you’re playing poker: instead of carrying on and running the risk of leaving with less, you end on a high note.
The opposite of a take-profit order is a stop-loss limit, which triggers the sale of stocks when prices reach a pre-determined low point. This helps traders to cut their losses and protect themselves if prices continue to fall further.
How do they work?
A trader will usually decide the activation price for their take-profit order based on technical analysis – relying on charts that show a stock or foreign currency’s performance over the past day or week. Generally, these orders are used for short-term trades as they can eat into profits when a trader has chosen a long-term strategy.
Why are take-profit orders a good thing?
Take-profit orders help take the emotion out of trading. When commencing a trade, you can coolly decide the price you’d be happy to walk away with – instead of letting emotions get the better of you and selling too early or too late. They also eliminate any need for traders to sell their stocks manually, meaning you don’t have to anxiously keep an eye on prices throughout the day.
And the downsides?
Although you’d be walking away with a profit, it is possible that a take-profit order would be executed just before prices continue to rise further, meaning you’ll miss out on a healthier margin. There’s also the chance for human error, so always double-check that your settings are correct to prevent any costly mistakes.