take profit

Trading is a risky business, and one of the keys to successful trading is understanding the tools of risk management. Stop loss and stop limit orders are two such tools that traders use to reduce their exposure to risk.

A stop loss order is a type of order placed with a broker in which an investor instructs the broker to automatically sell a position if it reaches a certain price. The order is most often used to place a stop on downside losses to prevent further losses. Put another way, a stop loss order will be triggered if the price of a security falls to the level specified in the order. For example, if an investor buys a stock at $50 and places a stop loss order at $45, the order will be triggered if the stock falls to $45, and the investor will be sold out of the security at that time.

The purpose of a stop loss order is to limit the risk of a trade by automatically stopping a position should it move to an undesired price. By controlling their risk in this manner, traders and investors can protect their capital and sleep soundly at night.

Stop limit orders are similar to stop loss orders, but with an important distinction. A stop limit order does not necessarily fill at the specified stop price, but will only fill at the specified limit price or better. That is, a stop limit order combines two order types--a stop and a limit order. An investor will place a stop limit order by specifying two prices: a stop price and a limit price. For example, if an investor buys a stock at $50 and places a stop limit order with a stop price of $45 and a limit price of $44, the order will be triggered if the stock falls to $45. However, rather than immediately selling the stock at $45 as with a stop loss order, the order will then become a limit order. This means that the position will only be sold once it trades at a price of $44 or lower.

The purpose of using a stop limit order is to ease the possibility of a trader getting filled at a significantly different price than was intended. Say, for example, that the stock at $50 rapidly falls to $45 and then continues to trade around that level for a period of time. With a stop loss order, the investor would be sold out at $45 before the stock stabilizes. With a stop limit order, the investor will only be sold out at $44 or lower--giving the stock time to settle at a more advantageous price.

Stop loss and stop limit orders are just two of the tools available to traders and investors looking to reduce their risk. When used correctly and modified to fit individual trading styles and objectives, they can be effective tools for limiting losses and protecting profits.

Introduction

Take Profit is a technique used by traders to exit their positions for a profit when a predetermined price level has been reached. This type of position closure works well for short-term traders who like to lock in gains as soon as possible.

How It Works

Take Profit orders are set up to automatically close out an open position when it reaches a certain predefined level of profit. In order to set up a take profit order, the trader must enter in the details of the order, including the number of shares or units, the desired level of profit, the stop-loss level, and the desired expiration date.

Advantages

One of the biggest advantages of using a take profit order is that it forces a trader to forget about their position and trust the market to reach their desired level of profit. Without a take profit order, traders often have a hard time sticking to their plan and protecting their gains. This type of order also allows the trader to enter into a position knowing that if the market moves in their favor, they will be able to close it out for a preset level of profit.

Risks

While take profit orders are a great tool for helping traders to stay disciplined, they can sometimes lead to taking small profits too soon. For example, if the market moves in the trader’s favor, but then reverses and goes much further in the opposite direction, the trader will have missed out on larger profits by closing out their position too soon.

Conclusion

Take profit orders can be great tools for traders who are looking to protect their gains and stay disciplined. By setting up a take profit order, traders are able to have their positions closed out automatically when the desired level of profit has been reached without the need to constantly monitor the market. However, traders should use caution when setting up take profit orders, as they can lead to premature exits.