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In trading, it is important that you have a trading strategy and stick to it consistently. Therefore it is important that before you open a position, you think about where the price will go and where your profit limit is and where you can close the position in the worst case.
Those who have studied trading psychology will realize that once the trade is opened, it is often too late to make such decisions rationally. Practice has shown me and many other traders that as soon as fear of loss, greed, hope and other feelings are involved, they influence our behavior significantly.
Essentially, there are two good measures you can take when opening a trade.
- The Stop Loss Order – which helps you automatically close a position when a certain price is reached.
- The Take-Profit Order – which will automatically close a position when a certain price is reached.
You should always set the Stop-Loss Order! No matter what happens, how much of a hurry you are in or what your specific strategy is.
The Take-Profit Order is optional but can be very useful in some cases.
What is a Take-Profit Order?
Definition: A Take-Profit Order closes an open position at a pre-defined price with a Market Order, i.e. at the current best possible selling price.
So if your stock is currently at 100 Euros and you are speculating that the price will go up, you can use a Take-Profit Order to specify that the stock will automatically be sold when the position is opened or afterwards, when the price reaches 120 Euros. This way you can fully automatically secure your profits.
Automatic selling in this case means that a market order is triggered and the stock is sold at the best possible price. (Note: There are also certain variants – but for the sake of simplicity we will only look at these for now).
How the position is closed is important for you to understand that you will not necessarily receive exactly 120 Euros for your share. If the price continues to rise after that, you may receive more for your share. If the share price suddenly drops again, for example, because an obvious resistance has been reached, you may also receive less for a share.
Exactly for such cases, there are special order types that set a minimum price, but more about this elsewhere.
The important thing is that you can automatically secure your profits with a take-profit order.
How do I set a Take-Profit?
If you work with the trading software Metatrader, you can set a stop and a take-profit price directly at the opening of the position.
The picture shows, how you can set both the stop-loss and the take-profit directly when creating a new order in Metatrader.
You can also reach the same window afterwards by right-clicking on the position in the bar with the open positions at the bottom of the screen and then clicking Edit position.
Then you can set one take profit at a time.
When you should use a take-profit
The basic rule on the stock exchange is to let profits run and limit losses. So you should always bet a stop loss, but not always a take profit.
Some trading strategies, such as the trend-following strategy, do not provide for a take-profit at all. However, in other strategies that are shorter term, such as the break-out strategy (presented in the day trading course), it makes sense to work with a take profit.
- Basically, if you are only trading short-term, but cannot monitor the open position, for example, you should set a take profit.
- If the price will most likely bounce off price markers such as resistance or support lines, you can also work with a take profit.
Other areas of use depend on your strategy.