Take-profit orders, also known as T/P orders, are an important tool that every forex trader should understand and utilize for effective risk and money management. This comprehensive guide will provide you with everything you need to know about using take-profit orders for your forex trading strategy.

What is a Take-Profit Order?

A take-profit order is a type of pending order that you can place on an open forex trade to automatically close the position once price reaches your specified take-profit level. The take-profit order closes your trade at a profit by triggering a sell order on a long position or a buy order on a short position.

Take-profit orders allow you to specify the exact price level where you want to take profits on a trade and exit your position. They help you lock in gains and protect any profits made if the market moves in your favor. Take-profit orders give you more control over your exits and let you pre-define your risk/reward ratio for each trade.

Why Use Take-Profit Orders in Forex Trading?

There are several key benefits of utilizing take-profit orders as part of your trading plan:

1. Locks in Profits

One of the biggest advantages of take-profit orders is that they allow you to lock in profits at your target exit price automatically. Manually closing trades at optimal levels can be challenging, but take-profit orders trigger closes once your profit target is reached.

2. Pre-Defines Risks

Take-profit orders let you pre-determine the reward side of your risk/reward ratio before entering each trade. This helps you define and limit potential losses based on the profits you aim to gain.

3. Creates Discipline

Implementing take-profit orders requires traders to have a disciplined approach with clear profit targets for each trade. This removes the greed element and emotional decision making when trades move in your favor.

4. Automatic Execution

Take-profit orders guarantee execution at your predefined exit price, removing reliance on you monitoring the market constantly. This frees up time and removes the risk of exiting manually too early or too late.

5. Risk Management

Using stop losses and take profit orders together allows you to define your maximum risk and potential reward for each forex trade placed. This effective risk management helps protect your trading capital long term.

How Take-Profit Orders Work

Take-profit orders function by triggering a closing sell order on an open long position or a closing buy order on an open short position.

For example:

  • You go long on EUR/USD at 1.1500 with a take-profit order placed at 1.1600.
  • The price climbs up and reaches your take-profit level at 1.1600
  • The take-profit order is triggered, automatically closing your long position by selling EUR/USD at 1.1600 for a profit.

Similarly, if you were short EUR/USD at 1.1600 with a take-profit order at 1.1500, the order would close your short by buying back EUR/USD at 1.1500 when the price fell to your target.

Once your take-profit order executes, the position is closed and removed from your open trades. The realized profit (minus any spread/commission costs) is added to your trading account balance.

Placing Take-Profit Orders

Take-profit orders can be placed when first opening your position or can be added to existing open trades. Here are the steps to place a take-profit order:

  1. After opening a long or short forex position, access the ‘Pending Orders’ section of your trading platform.
  2. Select ‘Take Profit’ and enter the price level where you want the order to trigger.
  3. Adjust the take-profit order parameters as required (we’ll cover this next).
  4. Double check your take-profit price level and order details.
  5. Confirm placement of the take-profit order.

Once submitted, the take-profit order will remain pending until the price reaches your specified level and executes the order.

Take-Profit Order Parameters

When placing a take-profit order, there are several parameters you can specify:

  • Take-Profit Price – The price level where you want the order to execute and close your position.
  • Expiry – A take-profit order can be Good Till Cancelled (GTC), meaning it remains active until manually cancelled, or have a fixed expiry time.
  • Time in Force – You can choose GTC, GTD (Good Till Date), FOK (Fill or Kill), or IOC (Immediate or Cancel) execution types.
  • Order Size – The take-profit order can close your full position size or partial amounts.

Choosing Your Take-Profit Levels

Choosing optimal take-profit levels is an important part of utilizing these orders effectively. Here are some tips for selecting your take-profit prices:

  • Risk/Reward Ratio – Set take-profit distances based on a favorable risk/reward. For example, a 1:2 ratio means setting take-profit twice as far from your entry as your stop loss.
  • Chart Levels – Technical levels like support, resistance or moving averages can indicate good areas to target profits.
  • Currency Volatility – More volatile pairs like GBP/JPY require wider take-profits than slower pairs like EUR/CHF.
  • Trade Style – For short-term trading, tighter take-profits are recommended. Use wider targets if you have a longer-term directional bias.
  • News/Events – Upcoming events that could impact price should be considered for your take-profit timing.
  • Trade Size – Bigger position sizes may warrant tighter take-profits, while small trades allow wider targets.

The examples below demonstrate potential take-profit placement on long and short trades:

Long Trade Take-Profit

  • Entry Price: 1.1500
  • Stop Loss: 1.1450 (below 50 pip stop loss)
  • Take Profit: 1.1600 (above 100 pip take profit)

Short Trade Take-Profit

  • Entry Price: 1.1600
  • Stop Loss: 1.1650 (below 50 pip stop loss)
  • Take Profit: 1.1500 (above 100 pip take profit)

This allows a 2:1 risk/reward ratio, with take-profit twice as far from entry price as the stop loss.

Using Partial Take-Profits

Rather than closing your entire position at a single take-profit level, you can stagger take-profits to close portions of the trade at various price points. For example:

  • Long EUR/USD at 1.1500
  • Set take-profit orders at:
  • 1.1550 to close 25% of position
  • 1.1600 to close 50% of position
  • 1.1650 to close remaining 25%

This allows you to lock in some profits at more conservative levels, while leaving room for further gains if the trend continues.

You should scale take-profit sizes appropriately based on your trading plan. Smaller partial targets to begin with are recommended to maximize profit potential.

Trailing Take-Profits

Trailing take-profit orders allow your take-profit price to automatically update based on favorable market movements. As price climbs higher for long trades or lower for short trades, the take-profit level “trails” behind at a defined distance from price.

For example, you could set a trailing take profit 50 pips from the current market price. As price rises, the take-profit automatically updates to lock in 50 pips under the high reached. This allows you to benefit from extended upside moves in trends.

Make sure to use reasonable trailing distances – too tight risks getting stopped out prematurely, while too wide may not lock in much additional profit.

Using Take-Profits and Stop Losses Together

It is highly recommended to use take-profit and stop-loss orders together on all trades. This allows you to define your maximum risk (with the stop loss) and lock in gains (with the take profit) for effective trade management.

For example, you could use a 50 pip stop loss with a 100 pip take profit on a EUR/USD trade to capitalize on upside. If price drops 50 pips you are stopped out for a small loss, but if EUR/USD climbs 100 pips the take profit locks in your gains.

Using both orders together on all trades is a key practice of successful forex traders and critical for long-term viability.

Pros and Cons of Take-Profit Orders

Take-profit orders have some clear advantages but also come with drawbacks to consider:

Pros

  • Automatically lock in profits
  • Pre-define risk/reward ratios
  • Create trading discipline
  • Effective risk management
  • Free up time from monitoring trades

Cons

  • Price may spike further after take-profit executes
  • Requires planning and strategy for placement
  • Fill prices can vary from specified price
  • Not guaranteed to fill if volatility spikes

Overall, the pros heavily outweigh the cons in most trading plans. But be aware of the limitations and account for market volatility when using take-profits.

Alternatives to Take-Profit Orders

While take-profit orders have many benefits, there are some alternatives worth considering:

  • Manual Exits – Manually closing positions allows real-time adjustments but requires active monitoring.
  • Multiple Take-Profits – Use staggered multiple take-profits instead of a single target.
  • Mental Stops – Some traders use “mental” profit targets without formal take-profit orders.
  • Technical Analysis – Utilize indicators, patterns or candlestick analysis to time profitable exits.

Depending on your trading style, a combination of take-profit orders, manual exits based on technical analysis, and mental targets may be optimal.

Common Take-Profit Order Mistakes

While very useful if utilized properly, there are some common mistakes traders make with take-profit orders:

  • Using wide take-profit levels results in limited profit potential.
  • Setting take-profits too close to entry can lead to getting stopped out prematurely.
  • Not accounting for volatility can lead to missed take-profits or negative slippage on fills.
  • Neglecting partial take-profits misses out on incremental gains in prolonged trends.
  • Failing to use stop losses with take-profit orders leaves trades exposed to excessive risk.
  • Not adjusting take-profits based on changing market conditions reduces adaptability.

Being aware of these errors can help you avoid them and use take-profit orders effectively for your trading system. Analyze your take-profit usage and results over time to optimize their placements.

Best Practices for Using Take-Profits

To maximize the advantages of take-profit orders and avoid common mistakes, here are some top best practices to follow:

  • Always use take-profit and stop losses together on all trades
  • Set take-profits at logical chart levels and based on volatility
  • Size take-profit distances appropriately based on risk/reward targets
  • Use partial and trailing take-profits to maximize profit potential
  • Adjust take-profit levels based on changing market conditions
  • Review order fills and performance to optimize placement over time
  • Combine take-profits with manual exits and mental targets where suitable

Following these best practice guidelines will lead to more effective utilization of take-profit orders and boost your forex trading performance.

Take-Profit Order Examples

Let’s look at some examples of take-profit orders in action on both long and short forex trades:

Long EUR/USD Trade

  • Enter long position at 1.1200
  • Place stop loss at 1.1150 (50 pips)
  • Take-profit order at 1.1300 (100 pips)

Price climbs up to 1.1300, take-profit order executes closing long position for a 100 pip profit.

Short GBP/USD Trade

  • Enter short position at 1.3100
  • Place stop loss at 1.3150 (50 pips)
  • Take-profit order at 1.3000 (100 pips)

Price drops down to 1.3000, take-profit order executes closing short trade for a 100 pip profit.

Trailing Take-Profit on AUD/USD

  • Long AUD/USD at 0.7200
  • Trailing take-profit set 50 pips from current price

AUD/USD climbs to 0.7250, take-profit trails price up to 0.7200 locking in 50 pips profit. If AUD/USD continues rising, the trailing take-profit will continue moving higher.

The Importance of Take-Profits for Forex Traders

While often overlooked by novice traders, take-profit orders are an indispensable component of forex risk and trade management. Here’s why take-profits are so important:

  • They automatically lock in profits at predefined levels
  • Allow you to implement a defined risk/reward ratio
  • Creating trading discipline and eliminates emotional decision making
  • Work in tandem with stop losses to manage risk on every trade
  • Take the complexity out of timing and executing profitable exits

Incorporating take-profit orders into your trading plan is essential for long-term success and consistency. They help take the emotion out of trading and provide valuable risk parameters for your trades.

Make time to learn how to effectively use take profits, and your overall profitability as a forex trader is likely to benefit significantly.

Final Thoughts on Take-Profit Orders

Take-profit orders are a simple yet often overlooked tool that can optimize the risk and reward dynamics for forex traders. By predetermining your exit levels where profits will be booked, you can effectively lock in gains, adhere to a defined risk/reward ratio, and take the emotion out of trading.

However, take-profit placement requires market knowledge and trading experience. You need to balance setting take-profits tight enough to bank incremental profits, but wide enough to give trades room to develop. Practice using take-profits regularly to gain experience with sizing and placement across different currency pairs and market conditions.

Overall, combining take-profit and stop-loss orders will significantly improve your risk management approach. By proactively limiting both the downside risk and upside reward potential on every trade, take-profits are an invaluable component of forex trading. Over time, regularly banking small to moderate profits on trades will compound into long-term success and consistency.

Make take-profit orders a non-negotiable part of your trading strategy and you’ll be better positioned to prosper in the forex markets long-term!