Should You Use A Take Profit?
Take profits allow us traders to automatically close out winning trades before the market turns against our positions.
Sometimes these orders can save us from the heartbreak of leaving money on the table, but that does not mean using take profits is the best option for long-term profitability.
To help you determine if using a TP is the best decision, here is what you should consider:
1. Do you trade trends, reversals, or ranges?
Before entering a position, you must ask – “How far will the market likely travel in my desired direction before turning against me?”. This is the most important question when considering if a TP suits your approach.
Strategies that go against market momentum will usually do better with a TP as these moves will end faster.
To break it down further:
- Trend trading strategies go with market momentum, so using a take profit is probably not the best option.
- Reversal strategies go against market momentum, but when successful, they can result in a considerable profit. I suggest using a TP but set it at a significant level (such as the beginning of the trend you expect to reverse) to lock in a good risk to reward.
- Range traders should be using a take profit as (most of the time) the market will reverse at the opposite band.
2. How often do you check the market?
If you are one of those traders who are constantly in front of charts, then manually closing winning positions when warning signals show is an option.
Just keep in mind that markets can move quickly, and emotions can get in the way of your execution.
3. Do you use trailing stops?
Trailing stops are manually or automatically adjusted as the market travels in a trader’s favor to ensure that profits are locked in if there is an adverse move.
By using these orders, you have a way to lock in profits while giving the market room to continue even further in your favor, reducing or even removing the “need” for a take profit.
4. Method of analysis
Technical analysts have visual levels to set TP’s, and quantitative traders have objective prices to exit. Using a take profit can be warranted for both forms of analysis because there is a logical place to put the order.
Fundamental traders are different in that they base their decisions on economic data and geopolitical events. Therefore it isn’t easy to predict how far price can go in their favor. Instead of blindly using take profits, it is better to exit when a fundamental theme changes.
5. Test what works best
As I said in the Should You Use a Stop Loss article – “All that matters is what makes the most money.” Backtest your strategy with and without a take profit to determine which option is the most profitable, then follow that.
Take profits can be absolute gold when combined with a strategy that suits these orders, or they can get you out of positions that could have resulted in far more profit. The key is to test what works best for you.
If this article helped you answer the question “Should I use a take profit?” then share it with someone you know is struggling with this.
May the market be with you.
Take profits FAQ
Take profits can save us from the heartbreak of leaving money on the table, but that does not mean using TP’s is the best for long-term profitability. Here is what you should consider:
- Do you trade trends, reversals, or ranges? Strategies with less momentum suit take profits.
- How often do you check the market? Can you close trades manually?
- Do you use trailing stops? This will help lock in profits without a take profit.
- Technical and quantitative traders have objective places to place TP’s. Fundamental traders don’t always have that luxury.
- Test what works best.