Forex trade has two kinds of special orders which allow closing a trade: stop loss and take profit. As you can guess from their names, the first one is a safe choice called to minimize losses while the second one aims at grabbing the most significant gains. This article will show how a take profit order works and why it is the best way to earn on Forex.
How Take Profit Orders Work
TP are limit orders triggered when a security reaches a certain value, determined by the trader. Once a certain upper limit is reached the position gets closed automatically, bringing profits to the investor. These orders are usually coupled with stop loss limit orders.
They are executed to stop further losses when the asset’s price drops to a certain point. By using limit orders of both types a short-term trader rids himself of the necessity to make trades manually and can maintain a fixed risk-to-reward ratio, which helps pursue a profitable strategy.
The key to making the most out of TP and SL is carrying out a comprehensive technical and fundamental market analysis. It is called to predict all possible scenarios of market behavior and choose order trigger points that maximize the profits considering any outcome. If you are new to it, here are some basic indicators to start with.
Using Support and Resistance
These are the very basic technical analysis indicators used to predict the upper and lower price levels of the asset. They are shown as the straight lines at the top and the bottom of the price charts. Whenever the value reaches one of those it is likely to bounce back and start moving in the opposite direction.
As you might have already guessed, a good place for the TP order limit is slightly under the resistance (upper) bar. In this case, the order will be closed at the top point, right before the curve begins its downward journey, securing the maximum possible gains.
Chart Patterns
There are many known and time-tested price plot patterns that help predict the future movement of the asset value. Let’s take a “Double Top” as an example. It’s a bearish pattern that shows consecutive price spikes with a slight drop in between followed by a significant value drop that plunges below the support level. It gives a trader a signal that a TP must be placed after the price drop to gain the most profits when a trend starts moving upward again.
It is just one pattern to use. Triple Tops/Bottoms, heads and Shoulders, Rectangular, and many others can give an edge to an attentive investor who can correctly identify them. They can give you an idea of how the market will behave in the nearest future and how you should adjust your strategy.
Risk-to-Reward Ratio
Traders use this ratio to compare the profits they expect to the deposit they are ready to lose in case of unfavorable events. To put it easy, this ratio tells how much an investor is going to earn on each dollar he risks losing. For example, if the ratio is 1:5 the possible gain is $5 with a risk of losing $1 if things don’t go as planned. When you have a desired risk-to-reward ratio calculated and know your SL limit, you can use it to determine a TP.
Conclusion
Take-profit orders make forex trading much easier and can help bring large profits when placed right. Remember to never rely on a guess when placing them, as it will lead to guaranteed loss. Take time to make an analysis, always calculate your risks, and don’t rush to
