How to Use Take Profit in Forex Trading?

Usually forex traders will set stop loss orders and take profit orders to prevent risks. Stop-loss orders are pre-specified orders that are set in advance to sell currency pairs at a specific price. Traders use stop-loss orders to set how much they are willing to lose on a particular trade. Stop loss orders can help you avoid bigger losses if you find yourself on the wrong side of the current trend. If you find yourself in the right direction, take-profit orders can help you lock in your gains once the price reaches a certain level. With stop-profit orders, you can specify a price in advance and close the trade once the price reaches it.

In forex market, if making good use of stop-loss orders and take-profit orders, you can effectively reduce risks and expand profits to a certain extent. In the past few days, we discussed the main points related to a stop-loss in forex market and listed some effective strategies for placing stop orders. Now we are going to explain to you what is take-profit orders, why profits matters and how to take profits in forex.

What is Take-Profit Orders？

Simply speaking, a take-profit order is one that establishes the precise price at which you want to close out your trade to make a profit. If this price is never reached, then the take-profit order does not occur. Therefore, if the price of the financial instrument you've invested in is climbing and reaches the price you've set as your trade-profit limit, the trade will be closed, making you some well-deserved money.

Generally, experienced traders will apply take-profit orders with stop-loss orders to manage their trades and protect them from either losing their profit or initial investment.

Placing a profit target is like a balancing act—you want to extract as much profit potential as possible based on the tendencies of the market you are trading, but you can't get too greedy otherwise the price is unlikely to reach your target. So you don't want it too close, or too far.

Why Trade With a Profit Target？

Establishing where to get out before a trade even takes place allows a risk/reward ratio to be calculated on the trade. Just as important as the profit target is the stop loss. The stop-loss determines the potential loss on a trade, while the profit target determines the potential profit. Ideally, the reward potential should outweigh the risk.

While we can never know which trades will be winners and which will be losers before we take them, over many trades we are more likely to see an overall profit if our winning trades are bigger than our losing trades. If day trading forex and our winning trades average 11 pips while our losing trades average 6 pips, we only need to win about 40% of our trades in order to a produce an overall profit.

By trading with a profit target, it is possible to assess whether a trade is worth taking. If the profit potential doesn't outweigh the risk, avoid taking the trade. In this way, establishing a profit target actually helps to filter out poor trades.

How to Take Profits in Forex？

One of the most difficult questions that a trader will ask themselves is when to take profits. This is a very complex issue, and as such has no one correct answer. The correct way for you to take profits will be different than someone else. It comes down to your trading style and timeframe much of the time.

1. Put an Order in to Close a Position When Necessary

One very popular way to take profit in a successful trade is to put an order in to close a position when the next support or resistance level is reached. This is one of the easiest ones to do, as long as you understand support resistance. The theory on this of course is the value will be able to avoid any whipsaw that the forex market may produce as it undulates along its course.

2. Look for Moving Average Crossovers

Moving average crossovers also serve as take profit signals for some traders. This tends to be a favorite of the longer-term trader, as it is a trend-following system. This approach allows for large areas for the forex market to move around in, allowing you to stay in the trade for much longer periods of time. Depending on the timeframe that you are using, this can be months or even years believe it or not.

3. Candlestick Recognition

Candlestick recognition is another form of technical analysis that will allow you to take profits at specific points. This is normally used in concert with support and resistance, as the two disciplines work very well with each other. For example, if you are long a particular currency pair and you spot a shooting star, this is a signal that the trade may start to work against you. If you marry this with a serious resistance area, this gives you two very strong reasons to consider exiting the trade. Conversely, if you are short a currency pair and see a hammer candlestick, this could be a trade that is about the work against you. This is especially true if support is to be found in the same area.

4. Close the Trade out at the End of the Trading Day

Another common and an extremely simple way to take profit is to simply close the trade out at the end of the trading day. Day traders do this every day, so that they can sleep at night without the worry of the trade working against them.

How to Set Take-Profit Orders on MT4？

* Open your MT4 platform.

* Click on +New Order on the menu at the top. A pop-up box will appear where you can place your trade.

* Pick the Currency Pair (Symbol) you'd like to trade, as well as the Volume and Type (Market Execution or Pending Order) of your trade.

* Enter your preferred Stop Loss and Take Profit prices in the dialog box, immediately under the Volume box.

* In some cases, if you selected Market Execution, the boxes where you input your Stop Loss and Take Profit prices may not be available. You will be able to amend this once you have opened your position.

* Go to the Trade tab at the bottom of the MT4 platform. Here you will find all of your open trades.

* Right click on the trade you just placed and select Modify or Delete Order.

* In the pop-up box, you'll be able to set your preferred Stop Loss and Take Profit prices. Just remember that the Stop Loss and Take Profit you set must differ from the market prices by at least xx points(your platform required).