WHAT IS A TAKE PROFIT ORDER?

A take profit order plays a key role in many traders’ strategies and is used with assets ranging from stocks and foreign currencies to cryptocurrencies. When prices start to rise, orders serve as an upper limit and ensure that assets are sold before prices start to fall again. Imagine a poker player knows exactly when to leave the game table. Then instead of continuing the game, risking forfeiting his winnings, he finishes the game and stays in the money. This is roughly how take profit works.

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

HOW DOES THE ORDER WORK?

A trader typically selects the activation price for their take profit order based on technical analysis. They rely on charts that show the performance of a stock or foreign currency 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 chosen a long-term strategy.

WHAT IS THE BENEFIT OF TAKE PROFIT?

A take profit order helps to avoid emotions when trading. When opening a trade, you can calmly choose the price at which you are ready to exit, rather than giving in to emotion and selling assets too early or too late. They also save traders from having to sell their shares manually and constantly monitor prices throughout the day.

ORDER MINUSES.

Although take profit guarantees profit, it is possible that the order will be executed and prices will continue to rise. Consequently, you may miss out on more substantial profits. There is also the possibility of human error, so always make sure your settings are correct to avoid costly mistakes.

WHAT IS A STOP LOSS ORDER?

Stop loss orders allow traders to automatically put their stocks up for sale if they fall below a certain price. They help prevent losses when stock markets show a downturn, as well as eliminate emotion in trading.

EXAMPLE

Let’s say you bought $1900 dollars worth of Amazon stock and you are worried that the prices might start falling soon. In such a case, you could set up a stop loss order that will cause you to sell the stock as soon as it drops below $1850. While there is no guarantee that you will get that price from a buyer, your shares will be sold at the next accepted price in the market.

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

THE VALUE OF A STOP-LOSS ORDER: PROS AND CONS

Stop-loss orders allow investors to think ahead about the price at which they want to sell their shares, preventing rash and potentially unprofitable decisions. Such an order also saves shareholders from having to constantly monitor changes in the market. The action to sell will happen automatically if prices fall to a preset 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 $1750 the next day, you’d lose $100 more than you’re prepared for.

Also, stop-loss orders don’t take into account when prices are rising. If Amazon’s prices temporarily soared to $2500 and then went back to $1850, you wouldn’t make any profit. A trailing stop order would work well here. You could use it to make the selling price rise in proportion to the rise in the stock price. If you set a trailing stop order of 10%, it means that your Amazon stock would be sold when it falls 10% from its last high. The sale would then occur at $2250, which is $400 more than if you rely on a simple stop order.