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What is Take Profit Order and Why Should You Use It?

Complete Cryptocurrency Trading Course

Predefining target point is usually as important as predefining stop loss.

While you are not in a trade, you can look objectively than you would do if you would be in a position. 

Fear will force you to close a position too soon, and greed will push you to hold longer for more profit.

That’s why you should journal your entry, stop loss, and target point before opening trade and stick to those predefined price levels. 

It is essential that once your trade goes well, to utilize you being right by booking the profit.

Do not leave your profit at the table because you were hoping for more.

In trading, hope doesn’t work. 

However, you do not want to close it too early and miss a significant portion of the profit.

You need to balance between those two sides.

If you do this while you are in a trade, it will be very stressful for you. 

How to balance between being greedy and fearful?

To extract as much as possible from every trade, it is essential to have a predefined exit plan.

It means that you predefine both, stop loss and take profit orders and once you enter the trade, it is only a waiting game.

By doing this, you will make a decision before you enter the trade.

It will help you stay objective and in those conditions, you will have the biggest chance to determine what is a realistic target as well as stop-loss area. 

There are two types of take profit orders as well. However, comparing to stop loss order, the market take profit order is not that important and here is why. 

What is the difference between market stop loss and take profit order?

Let’s imagine the situation that you bought some coin at $100.

You decided to place stop loss at $90 and take profit at $130.

As you did a good job and price reached your target point, there are two ways of booking the profit.

By putting a limit order at $130, you are actually placing a sell order.

There should be a buyer at $130 to fill your sell order.

If there is no buyer, the price won’t be able to go above that level because your sell order will act as a wall that stops price from going higher.

If you put market order, once the price reaches $130, it will be closed automatically at that price or lower.

We advise you to use limit take profit order because it is hard to imagine that your price gets hit and that it drops automatically without filling your order.

If that happens, you were unlucky and chances for that are very low.

Even if that happens, you have still a chance of closing it manually below that price.

It is usually more expensive to use market order that’s one more reason why using a limit order, especially for day traders, is much better. 

A take profit order is often bundled with a stop loss, which helps define your risk-reward. 

A risk reward and appropriate trade size can go further than your trading strategy in determining how successful you are in the markets.

Therefore, a take profit order allows you to limit your risk or exposure to the market by exiting your trade as soon as the market prints a favorable price for you and not staying in any longer.

Why do you need to use a take profit order?

You do not have to be in front of your trading desk all day long. 

By simply putting take profit order, once your initial target is reached, you will book profit and move onto the next trade. 

Another reason is that it helps you avoid paying high fees. 

Using take profit order means you are a market maker because you bring liquidity to the market and because of that, you are being awarded by lower fees. 

In some examples, exchanges will pay you extra fees for being the market. 

What is take profit strategy?

You need to choose how you are going to book your profits. 

There are two main options:
1) Booking on the initial target
2) Partially booking on the way to target

Either way, you choose, please make to be consistent. 

We backtested both principles, and the results are almost equal in the long-term perspective. 

The problem arises when you mix these two and that the times the worst performances are happening. 

Choose one of these two and stick to it.