How to set Take Profit correctly

Closing the position is often more important than entering it. We all constantly hear about the fact that you cannot trade without stop losses, but at the same people pay too little attention to the Take Profit order.

It’s time to correct this mistake. In today’s material we will talk about the importance of Take profit, methods of its calculation, if it is possible to trade without Take profits and … a few more critical nuances.

What is Take Profit and why you should set it

Take Profit is a pending order to close a position after reaching a certain price level. It is set up in order not to lose the profit, even if the price of the asset “hooked” the target level only for a second. Take profit allows to systematize trade and does not let emotions (greed and hope that the price will continue to go in the right direction) to prevent the trader from taking the planned profit.

The closing of the transaction looks the following way:

1. The trader opens a long position on the GBPUSD pair;
2. At the same time, he places a take profit order in the area of local highs, outlining the profit target;
3. The price goes up;
4. When the take profit is reached, the transaction is closed, profit is automatically fixed;
5. After that, the pair goes into correction and the price starts to decrease.

Thus - a trader was able to not only open a deal in the right direction but also to take profits just at the moment when the trend ended up. Of course, catching the movement at the right time doesn‘t always work out, but take profit, at least, allows you to guarantee a closed position with a profit.

How to set Take Profit in MT4/MT5 ?

Technically, you can set the take profit in two ways.

At the moment of opening the order

The easiest and most effective way of setting a take profit is at the time the deal is opened. It is always better to plan the moment of closing the position and setting the order in advance.

In order to set the take profit at the same time as the opening of the transaction, you need to change the order settings. In the MT4 terminal, the order window can be opened by clicking the right mouse button on the ticker of the currency pair by selecting the appropriate command. In the transaction window, before clicking Buy or Sell, you need to specify the target value in the “Take Profit” field. For buy orders, this value should be greater than the price of the transaction, for sale - less.

When setting up a pending order, the Take Profit field is filled in the same way.

For an already open deal

Sometimes a trader, even realizing the purpose of the transaction, does not have time to set the take profit at the moment of opening the position (for example, there is a lot of volatility in the market and, in a couple of seconds, you can lose several points). In this case, the take profit can be set for an already open deal.

In MT4, this operation can be performed by right-clicking on the open transaction and selecting the “Modify or Delete Order” command. In the window that opens, you can change the stop loss and take profit parameters and, in particular, configure the TP from the beginning.

Methods of setting take profit

There are many ways to set a take profit. They may differ, depending on the trader’s trading style and the rules of his trading strategy.

By time

This method is effective, for example, for intraday trading. When the trading system is designed for market analysis during one-day session, at the end of the day all transactions must be closed regardless of the outcome.

For example, if a trader opens a position for sale at 9 o’clock in the morning, then at 11 pm, when the American session comes to an end, and the trade ceases, one should leave the market.

At key levels

Key price levels are some of the strongest benchmarks for setting both stop loss and take profit. The level at which the price has previously slowed or turned around may become a strong support or resistance level, depending on which side of the open position it turned out to be. Therefore, setting the take profit to this mark is most justified: if the price moves in the right direction, it is likely to reach a key level, but whether it succeeds in breaking it, is a big question. Therefore, it is better to take profits at a time when the price reaches an important mark, and if it then breaks it, open a new deal.

At round levels

The principle is similar to setting TP at key levels. Round level is also an important psychological barrier in the market, the price tends to it but does not always pass it for the first time.

For scalpers and intraday traders, except for round levels (1.2500, 1.2600, etc.), relevant are the levels ending in 20, 50 and 80 (1.3420, 1.3780, etc.).

At Fibonacci levels

This principle is also similar to setting a take on key levels, but in this case, to determine the target mark, you will need to use the Fibonacci tools. In the MT4 terminal, they can be selected through the “Insert / Fibonacci” tab in the top menu.

You stretch Fibonacci lines on the basis of the previous trend. They help with predicting the future price movement in the opposite direction (correction). When opening a trade after a trend reversal, the level 61.8 will be a good target.

The mark on which Fibonacci coincides with the round or support/resistance level will be the best option for setting the take profit.

Confluence

The optimal goal for take profit will be confluence (combination) of several levels. This can be, for example, combining the level of support with a round level, either with one of the Fibonacci levels or all at once. The more levels are combined at one point, the stronger the signal, and the more effective will be the take-profit placed on it.

By volatility

To set take profit by volatility, it is most convenient to use a special service (for example, mataf.net), which determines the average candlestick per hour, day, and other statistical indicators. On their basis, you can set a take profit.

Choosing the right currency pair on mataf.net, you can see the indicators of its volatility. When trading within the day, the trader will be interested in the average value of a day candle.

If, for example, the GBPUSD price is 100 pips per day on average, and the deal opens when the price has already passed 20 points in the right direction, more than 80 pips from this transaction are not expected.

Setting take profit by volatility is quite a general option, but it makes sense when the trader does not have other benchmarks, like key levels.

By the local extremum

Such an exit from the position is carried out more by hand than by automatic take profit.

If the price, moving in the right direction, formed a new extremum, and then began to roll back, it makes sense to close the position manually. The new extremum signals that the movement has exhausted itself at the moment and it is not known whether the trend will continue. At the same time, a new level has been formed on the way of the price, which will complicate further movement.

Even if the take profit was established earlier and the price did not reach it, in such a situation it is better to close the deal manually and take back the profit at the moment.

After a big candle

Another option for closing a deal manually. As a rule, after the formation of a large candle, the movement slows down and correction occurs, sometimes a quite strong one. If a big candle that brought a significant profit was formed, with an open transaction in the right direction, it is better to close the deal, which will save this profit.

By Overbought / Oversold Oscillators

This method of closing the transaction is also carried out manually and will require the personal presence of the trader behind the terminal.

On the asset chart, you need to install one of the oscillators. Usually, traders use stochastic to determine overbought / oversold zones, but you can also work with RSI or Bill Williams indicators. When buying, you need to wait until the oscillator lines rise above the 80 level - after that, you should close the deal. For sales, level 20 serves as a benchmark. On other oscillators, the levels may differ (sometimes you need to assign them yourself), however, the principle is the same everywhere.

The downside of this method is that in the case of long-term trends, the oscillator enters the overbought / oversold zone rather quickly and stays there, or starts to fluctuate up and down as long as the price goes in one direction. As a result, the trader closes the deal at the very beginning of the trend, taking only a small part of the possible profit.

This disadvantage can be compensated for by adjusting the sensitivity of the indicator, but it is necessary to determine the optimal parameters empirically.

Stop Loss * N

One of the easiest ways to set a take profit, however, it requires the proper installation of stop loss. After setting the stop loss, the take profit is set at a distance of one and a half, two, three or more times bigger. Thus - a positive mathematical expectation of trade is ensured.

However, the market is not tied to such factors in any way, the factors that really affect the price at the moment, are not taken into account when setting out the take profit.

In some special cases (for example, with scalping), the take profit may be even less than the stop loss. However, it is rather an exception to the rules, in order to ensure a positive result, in the long run, it is necessary to ensure that the potential profit is greater than the losses, even exposing the take on levels or volatility.

Trailing Stop

A trailing stop is more a kind of stop loss, however, it provides protection of profit and allows to take everything from the movement. Trailing stop moves after the price at a given distance, for example, at 20 or 30 points. As long as the price goes in the right direction, trailing stop protects more and more profits, if it does, the floating stop loss remains in place to stop further losses if the trend reverses.

Without take profit - on the opposite signal

The use of take profit is recommended, but it is not a rigid immutable rule (as, for example, the use of stop loss). Therefore, there are possible options, one of which is the exit from the transaction not on the take, but on the opposite signal.

For example, an entry was made to a buy transaction when the price crossed the moving average from the bottom up. The deal closes when the price crosses the slider from top to bottom and closes below it. At the same time, you can open a transaction in the opposite direction.

By the previous wave of trend

Another option is to measure the previous trend wave in the direction of opening the transaction. In this case, it is assumed that the next wave should be about the same strength, and the price will pass the same number of points. Take profit is set at the same distance, but from the beginning of the current wave.

Fixed

Sometimes traders trade all transactions with the same take profit - for example, equal to 20 or 30 points. Such a tactic may create the impression of a stable fixed profit, but in practice, this is not the best approach.

The fact is that the conditions of each transaction are individual: sometimes the price can go as high as 100 points, and sometimes it turns around after 10. Disregarding the analysis of objective factors, and exposing a take profit that is not tied to them, the trader risks losing profits even when the price initially moved in the right direction.

Additional recommendations when setting take profit

 

Having chosen for yourself the way that best suits you and your trading system, pay attention to some nuances of working with take profit.

• Although among the ways of setting the take profit considered by us there are those that suggest taking a decision when the trader is already in the transaction, it is optimal to place a take profit before entering the market. While the deal is not open, the trader thinks the most soberly, when he has a profit on his account, emotions can prevail and the decision can be biased.
• When setting take profit by levels (and not only), it is recommended to set it a few points closer (below the buy level and above the sell level). This is done in order to ensure that the profit is guaranteed, even if the price just does not reach the level (for example, under the influence of market-makers who expect the orders placed at this point).
• It is not recommended to try to catch the entire trend movement. No one can predict the beginning and end points of the trend up to the point, and it is already considered a very good result to get a profit of 60% of the total movement. Remember this.

Conclusion

There are many ways to set a take profit, each of which has its advantages and disadvantages. For the combination of factors, the optimal option is to place the take on the levels, and in those places where they coincide, for example, with round price values or Fibonacci levels. However, it is worth remembering the stop loss to take profit ratio and positive mathematical expectation.

When trading by a particular trading system, it is likely that it will already have specific rules for setting the take profit. If there are no rigid frameworks in this plan, it is necessary to choose the method that is best suited for this TS, taking into account all general recommendations, as well as the need to comply with the rules of money management.

Take care, Michael

ForexTraderPortal.com