The Take Profit Strategy for Guaranteed Profits

A take profit is an order used in trading to close a position and make a profit when the price of a financial asset reaches a specific level.

When a take profit order is placed, the price at which the position is to be closed is specified and, once the price reaches that level, the order is executed automatically and the position is closed.

In a long position, for example, when we buy a certain value, we expect its price to rise and thus make a profit. But if the asset rises, and we do not sell at the right time, the value may fall again. The take profit allows us to collect the profits when the value reaches the indicated level, thus ensuring a profit.

take profit

For example, if a trader buys a stock at a price of £100 and places a take profit order at £105, it means that he wants to close the position and make a profit once the stock price reaches £105. If the stock price reaches that level, the take profit order will be executed automatically and the trader will make a profit of £5 per share.

It should be noted that if you are positioned “long”, the take profit order will go above the purchase value, and if you are positioned “short” the value will go below the purchase value. The take profit is the opposite of the stop loss.

Advantages and Disadvantages of Take Profit

Among the advantages of take-profit, we can highlight:

  • It allows to ensure a certain level of profits.
  • It is mainly useful for those investors with high risk aversion who do not expect high returns in highly volatile environments, but prefer greater security.
  • It is a strategy that can be complemented with a stop loss. In this way, losses are limited, while seeking to ensure a level of profits.
  • They are automatic orders, it does not require the investor to be permanently monitoring the market.
  • It can be used for both short and long positions.
  • The limit set can be adjusted as the price approaches the set boundary.

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However, we must also point out some disadvantages:

  • As it reduces risks, it is also a strategy that could be limiting potential profits. Let us remember that the higher the risk, the higher the return.
  • Although it is an order that is activated automatically, the level to be established to execute it will depend on the previous analysis carried out. If this fails, it could be setting a level too low or high (depending on whether the position is long or short, respectively).
  • Although it can be useful for those investors who operate more looking at the short term, for a long-term strategy it would not make much sense to limit profits. In these cases, it is preferable to “tolerate” losses in some periods, in the hope that in the distant horizon, profits will be obtained.

Practical Example

An investor buys 10 shares of the HY company at £7 per share. A take-profit order (sell order) is established at a level of £10, as the expectations are bullish.

The maximum gain of the operation is then:

10*(10-7)= £30

Now let's see an example with a short position. A short-selling strategy can be used. 10 shares of the HY company are borrowed at that time at £7 per share and sold at that price. A take profit (buy order) is established at £5 .

The maximum gain of the operation is:

10*(7-5)=£20

We must distinguish the take profit from the stop profit. The latter refers, simply, to a stop loss order with a profit result. Let's see an example. The shares of the KO company are bought at £10 , with an upward expectation, setting a take profit at £14.

The price of the titles rises to £13, and at that moment the investor adjusts the take profit to £15.5 . At the same time, to ensure profits, he sets a stop profit order at £12 . In this way, he ensures at least selling the shares with a profit of £2 each (12-10), although his maximum expectation is to earn up to 5.5 per title (15.5-10).

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How does take profit differs from stop loss?

Take profit locks in profits by closing a position at a specific price level, while stopp-loss limits losses by selling when the price falls to a set level.

Can I adjust my take-profit level as the price changes?

Yes, traders can modify their take profit levels as the asset price approaches the set boundary to adapt to market conditions.

Is take-profit suitable for long-term investment strategies?

Take-profit might not be ideal for long-term strategies that seek higher returns over time, as it could restrict potential profits in the distant future.

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