Take profit order
A take profit order is a stock order whose function is to close a trade if the price of the underlying asset reaches the target value in that trade.
The take profit order is set by the investor who owns the securities account. The take profit order can be buy or sell, depending on whether the initial operation is a short position or a long position respectively.
Take profit order profit
The reason why take profit is used is not to let a sudden change in the market leave the investor or trader without profit. For example, if we buy a share at 10 euros and we want to sell at 15 euros. The stock may rise to 16 euros a day at a certain time and hours later it will drop to 13 euros. The price has reached the price at which we wanted to sell, but since we have not been pending the quotation all the time, in the end the price has turned. Thus, with a take profit order we can allow ourselves not to be aware of the price of an asset minute by minute.
The take profit order is the reverse order of the stop loss order. The stop loss order limits the loss, while the take profit order limits the profit. There are different points of view on the use of take profit. For some traders, the use of take profit is essential to avoid being victims of market volatility. Others, however, advise against its use. Since a trader must limit the loss but should never limit the profit.
Using the trailing stop loss as a stop profit
The way to limit the possible profit is to use a trailing stop. A trailing stop is a stop loss order that moves in favor of price. Sometimes reaching the point of having a stop loss order on profits. Called, incidentally, in financial jargon as stop profit.
Importantly, trailing stops make sense in directional strategies. Or what is the same, in operations that seek to take advantage of a trend. With strategies for lateral markets, the trader will only reduce his profits.
Take profit and stop profit example
Suppose we want to buy 10 shares of Inditex. We placed an order and bought them at 29 euros each. According to our analysis of the company owned by Amancio Ortega, Inditex shares should be worth 35 euros. So I place a take profit order at 35 euros. When the price of Inditex reaches 35 euros, I will obtain a profit of 6 euros per share (35-29).
Since I bought 10 shares (10 * 6), my profit will be 60 euros. The advantage of using a take profit order is that you know what the profit will be in advance (in case the trade goes well).
Suppose when the price reaches 34 euros. We review our analysis, and we believe that the price will go to 40 euros per share. But we are afraid that the price will reach 39 euros and then turn against us. So what we will do is, as the price goes up, we will modify our stop loss. Let's imagine that the idea evolves well, the price reaches 37 euros. At that time, we will place a stop profit at 35 euros. If the price reaches 40 euros we will obtain more profit, but if it falls below 35 euros (our initial valuation) the operation will be closed.
There are many strategies with stop loss, take profit and stop profit orders. The discipline that studies the management of this type of orders is called monetary management in trading. Remember, yes, it is advisable to always use a stop loss to limit losses.