What Is a Take Profit Order?

Definition & Examples of a Take Profit Order

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A take profit order is a standing order to sell a security once it reaches a certain level of profit. Selling at this price ensures that the trader will make a profit on the trade.

Learn how a take profit order works to minimize risk and who should use one.

What Is a Take Profit Order?

A take profit order is a standing order put in place by traders to maximize their profits. It specifies a certain price above the purchase price, which is chosen by the trader. If the price of a security reaches that limit, it will automatically trigger a sale. If the price does not reach that limit, the order is not acted on.

A take-profit order is a short-term trading strategy. It is useful for day traders who want to take advantage of a quick rise in the cost of securities to make an immediate profit.

It is a type of limit order, though limit orders can be used to either buy securities at a low price or sell them at a high price.

Alternate name: Take-profit order, limit order, sell limit order

Acronym: T/P order

How Does a Take Profit Order Work?

To use a take profit order, day traders establish a price at which they want to sell a security. This price is one sufficiently above the price at which the security was bought to ensure that traders will make a profit on the sale.

Once the take profit point is reached, the order is triggered and the sale goes through at that day's current market value. If that point isn't reached, the sale is not executed, and the trader holds onto the securities.

A take profit order is often used with a stop loss order. This is a similar standing order which triggers a sale when the price of a security drops to a certain level. It minimizes, or stops, the loss the trader can experience.

A T/P order allows you to limit your risk or exposure to the market by exiting your trade as soon as the market prints a favorable price for you and not staying in any longer. 

Setting a take profit order requires a technical analysis of the security's value and the likely movement of the market. Some strategies for calculating an appropriate take profit order include:

A T/P order is an automatic exit strategy based on a profit-loss calculation, rather than an emotional decision to sell or hold.

Do I Need a Take Profit Order?

You may find take profit orders helpful if you are a trader with a short-term strategy. Using one allows day traders to exit the market as soon as they reach their profit goal for the day.

Often, the shorter-term a trader's strategy is, the better a take profit order is for that trader. Short-term traders without a take profit target may quickly see the gains they make slip away if they do not have a good understanding of when to exit.

Many indicators can help you see trends in the market and judge whether a take profit order is a good idea. One that is helpful for new traders is the average directional index (ADX). The ADX shows how strong a trend in value is on a scale of zero to 100. The weaker a trend is, the more likely it is to change.

  • Levels above 40 indicate a trend is strong and you should not use a take profit order.
  • Levels below 20 indicate a trend is weak and take profit orders may be a good idea.

Pros and Cons of Take Profit Orders

Every trader is willing to accept a different level of risk, and every trader has different goals and timelines that they work with while trading. Understanding the pros and cons of a take profit order will help you understand whether it is the right trading strategy for you.

Pros
    • Ensure a profit
    • Minimize risk
    • No second guessing
Cons
    • Not good for long-term traders
    • Can't take advantage of trends
    • May not be executed at all

Pros Explained

  • Ensure a profit. A T/P order is set to ensure that a day trader makes some level of profit. If your order is executed, you are guaranteed to make money on the trade.
  • Minimize risk. A take profit order allows you to take advantage of a quick rise in the market, rather than potentially missing the chance to sell at a profit.
  • No second-guessing. Traders who use T/P orders don't have to decide if it is better to buy or sell in the moment. The trade happens automatically without the risk of second-guessing the decision.

Cons Explained

  • Not good for long-term traders. Take profit orders are a short-term strategy to guarantee you make some level of profit quickly. They aren't appropriate for long-term traders who are willing to sit out more ups and downs in the market in order to make a larger profit in the end.
  • Can't take advantage of trends. Take profit orders don't allow you to take advantage of longer-term trends. Trend traders who use take profit targets are often frustrated when they’ve recognized a good trend and get out too early.
  • May not be executed at all. Having a take profit order in place doesn't guarantee that the sale will happen. If the market never rises to the T/P level you set, you may still have to sell at a loss.

Key Takeaways

  • A take profit order is a standing order to sell a security once it reaches a certain level of profit.
  • If that point isn't reached, the sale is not executed, and the trader holds onto the securities.
  • Take profit orders are a short-term trading strategy that allow day traders to take advantage of a quick rise in the market to make an immediate profit.
  • Using one minimizes your risk and avoids emotional decision-making in the moment.

Article Sources

  1. United States of America Department of the Treasury Comptroller of the Currency. "Consent Order for a Civil Money Penalty," Pages 2-4. Accessed June 18, 2020.

  2. Investor.gov. "Types of Orders." Accessed June 18, 2020.

  3. U.S. Securities and Exchange Commission. "Investor Bulletin: Understanding Order Types." Accessed June 18, 2020.

  4. U.S. Securities and Exchange Commission. "Stop Order." Accessed June 18, 2020.

  5. Science Direct. "Stock Market Index Data and Indicators for Day Trading As a Binary Classification Problem: Average Directional Index." Accessed June 18, 2020.