Take Profit (TP) is a pre-set order in trading that automatically closes a profitable trade once a specific price level is reached. The primary purpose of a TP order is to lock in profits and prevent potential reversals that could erase those gains. It acts as an upper limit for your desired profit on a trade.
Key Characteristics of Take Profit (TP):
Automation: Once set, the TP order executes automatically when the market price hits the specified level.
Profit Locking: It ensures that a certain level of profit is secured, even if the market continues to move in your favor, or if it reverses.
Risk Management: While primarily focused on profit, it's also a part of a comprehensive risk management strategy, as it prevents greed from leading to a loss of accumulated gains.
Opposite of Stop Loss (SL): While a Stop Loss aims to limit potential losses, a Take Profit aims to secure potential gains.
Example in Trading:
Let's say you are trading a stock, XYZ Corp., and its current market price is $50. You believe the price will rise to $55, but you also want to protect your profits if it does.
Entry: You buy 100 shares of XYZ Corp. at $50 per share.
Take Profit (TP) Order: You immediately place a Take Profit order at $55. This means that if the price of XYZ Corp. reaches $55, your 100 shares will be automatically sold.
Scenario 1: Price Rises to TP: The price of XYZ Corp. rises to $55. Your Take Profit order is triggered, and your 100 shares are sold at $55.
Result: You make a profit of ($55 - $50) * 100 shares = $500. This profit is secured regardless of what happens to the price afterward.
Scenario 2: Price Exceeds TP and then Reverses: The price of XYZ Corp. rises to $55, triggering your TP order and selling your shares. Later, the price might continue to rise to $58, but then sharply fall back to $52.
Result: You still secured your $500 profit at $55, even though the price briefly went higher, or if it later reversed significantly. If you hadn't set a TP, you might have held on for more profit and ended up with less, or even a loss if the reversal was strong enough.
Scenario 3: Price Doesn't Reach TP: The price of XYZ Corp. only reaches $53 and then starts to fall. Your Take Profit order at $55 is not triggered.
Result: In this case, your profit target was not met, and you would need to decide whether to hold the position, adjust your TP, or close the trade manually based on your trading strategy and risk tolerance.