Intro: the Take Profit (TP) is an important component in all trading activities. TP is one of the aspects that particularly interest actors in the forex market and on other market in general. As well as it is for the Stop Loss (SL), how to place the TP? is another dilemma for traders. If the SL is related to the risk by taking a position in the market, the TP has direct relationship with rewards traders perceive for his open positions in the market. These two elements TP & TP complete the two faces of the money management (MM).
We can find several kinds of TP setup, because each trading system can match a particular type of TP. So we understand that the particular configuration of a TP also meets the personality of each trader. Is that why it is not easy for traders to give a unanimous answer to the question: how to place a TP?
Definition: TP is a limit order used to close a position when the market reaches a certain price level. TP is usually associated to the expected reward planned in advance by the trader in case that his positions will go in the same direction the market will take. This level of award is determined by the trader according to his trading plan, if he has one. The TP reflects also the traders' attitudes toward the pursuit of profit for the risk taken on each trade.
Considerations and typology: the TP is part of the torque risk/reward (R/R) where TP balances the SL. The trading game turns around the MM which is a system formed by the TP and SL axes where the bulls and bears try to win more pips with their TP setup when the market goes in the same direction as them. Based on probabilities, many experienced traders proposed some TP standards, the most current one is that they conclude that the TP must be 2 or 3 time the SL value. Is it wise to place a TP only on this basis?
Although this kind of TP may not be conveniently placed, but it seems like this TP standard gives satisfactory results. And that is what matters in the forex "earn pips", isn't it? However, we will check about the type of TP and other factors to consider in order to be evaluated for good TP setup. Then, we must admit that it exists many TP classified according to certain market conditions or traders' perceptions; let's review them:
TP based on SL: this TP is a fixed TP and it depends on the value of risk taken on each trade. For some traders this TP = 2 SL, for others this TP = 2.5 or 3 SL. It is not really recommended that this TP is less than or equal to 1 SL and greater than 3 SL, because those values below 1 and above 3 will put the traders' open positions fighting again the trading probabilities. Then the positions will be in the market with the wind in front, which is actually not a wise decisions.
Equity TP: is based on a percentage of a maximum gain wanted on the account's capital. Let us refresh something, it is always exhorted to traders to have in their trading psychology the principle about: to not be too greedy, which means they have to take their profits at the right time. And if we consider an analogy with the TP based on SL, we can conclude that the equity TP should seek to increase the account capital between 4 and 6%.
Price levels TP: that can be TP based on Fibonacci levels. But, this TP is typically considered for support and resistance price lines. According to a strategy position based on support and resistance, buy or sell positions will be taken when the market reaches the price line around the second or third support and resistance points.
Graph TP: this TP is determined by the forms of the past market prices. They can be levels drew with horizontal or oblique lines; or simply they could be chartists figure lines created by the evolution of the market prices.
Volatility TP: a TP setup could depend on the volatility manifested on a specific timeframe. This kind of TP could be named volatility TP. This TP is generally calculated to get the most reward that the volatility on the market can offer. We can estimate this TP by the pips differential between the market price and the Bollinger bands.
You can also use the technical indicator ATR (Average True Range) to gauge this TP. By this way, they calculate the TP with a pattern based on the ATR 21 on 1H/1D chart where TP = 2, 2.5, 3 ATR. This pattern gives good results for many traders and is considered that on 1 in 2 chance of winning or losing trades, the ratio gains/losses will always be positive.
Timing TP: for some traders timing TP is a special TP based on the market behavior according to the market clocks. They predetermined a timeframe (1H e.g.) considering the market movements on previous periods. Sometimes we also talk about timing TP considering the news' publication schedules for the pairs. Then, some traders put a small TP when some market are closed or a larger TP at 10-11 AM New York time.
Caution! on internet people can find other types of TP with no relevance at all.
Execution: now the dilemma is how to place a good TP? To answer that question wisely, we must make use of a multidimensional approach where we involve many criteria in our TP setup, because the TP has to be taken as part of a system: the MM system. A good TP setup must enclose the market price patterns because it would no be effective to place a TP outside the boundary lines of a chartists' figures or a price line levels. Volatility could be considered too in the TP configuration in case where the trader operates with strategies based on Bollinger bands. It can also be a good decision that the equity can be part of the TP setup, although this decision embraces only one variable.
To grow in a trading career, we have undoubtedly to incorporate good TP measures in our MM. For example, manage trading positions with 1:3 R/R ratio allows traders to stay profitable with a negative ratio with 60% losing traders. Because, the trader will have positive results in pips with his 40% of winning trades based on the 1:3 R/R ratio.
Bad TP setup is the worst enemy of your account growth and you motivation? We often heard that we never go wrong taking our gains. This adage may be right; however we must learn to take our gains in a timely manner. In reality the market takes the direction it wants, regardless of the most rational and objective analysis, and no one can predict what the magnitudes of the movements the market will experiment. Traders must enter in a trade purchasing the highest profit level the market is able to give. Then, whenever it is about TP designs, it is necessary to understand the mechanism of some methods like the Donchian one and the turtles' rules for example.
Traders should always play with the probabilities on their side in order to be winners, and try that in the long run, the balance R/R ratio always gives them positive money feedbacks. Success in trading depends on understanding the R/R ratio management. Traders, must give to rewards a mean importance in the MM equation where MM = TP / SL. If good SL setup can be considered as the accounts' savior by preserving them from uncovered drawdowns, good TP setup is the key element that catalyzes the accounts' growth providing substantial gains when the traders' positions are winning in the market; because to win is why traders are trading.
Then, for TP setup we fully recommend the application of the principle that says: let your winning positions run. By that traders have to figure out the way to integrate this principle in their TP setup, perhaps following the Donchian method or turtles' rules. Any way, each trader has to strike on the way to reach the winners' goals.
Conclusions: generally emphasis is put on MM meanings, but considering almost only the importance of the SL, where TP was nearly forgotten as part of the MM equation. In fact, MM is an ambivalent management where both sides TP & SL have to be pondered, namely wins and losses. As final opinion, it is more advisable to balance the MM equation so that:
1) we take the more profits possible that the market can offer by letting our gaining positions run, and
2) in order to be profitable, build the positions MM with positive ratio in pips so the R/R gives beneficial money feedback on every positions taken in the market.