Take Profit (TP)

Take Profit (TP) is an order placed by a trader to automatically close a position once the price reaches a certain level that results in a profit. It is a risk management tool used to lock in profits when the price of the asset moves in the trader’s favour.

When entering a trade, the trader sets a specific price level at which they want to close the trade and secure their profits. This level is based on technical analysis, such as support or resistance levels, price patterns, or risk-to-reward ratios.

Once the market price reaches the TP level, the order is executed automatically, closing the trade at that price. This allows the trader to capture profits without needing to monitor the position constantly.

For buy trades, the take profit order is set above the entry price. For sell trades, it is placed below the entry price.

Such trades are closed at the current market price, however during volatile market conditions there could be a gap between the TP level and the actual execution price. The order may be executed at a worse price than intended.

So, even though take profit orders are a useful tool for locking in profits automatically which provides risk management and emotional control, traders still must be cautious of the potential limitations, such as missed opportunities and slippage.

Properly analyzing market conditions and adjusting take profit levels as needed can help mitigate these risks and improve overall trading strategies.