Take profit is a predetermined price level at which a trader exits a winning position to secure gains. It is an order that automatically closes a trade when the price reaches a specified target, ensuring profits are locked in before the market can reverse.
A take profit order is placed at a price above the entry for long positions or below the entry for short positions. When the market reaches that price, the position is automatically closed at a profit. Take profit levels are typically determined by technical analysis (support/resistance, Fibonacci levels), risk-reward ratio targets, or fixed pip/point targets. The take profit distance, combined with the stop loss distance, defines the trade's risk-reward ratio.
You buy EUR/USD at 1.1000 with a stop loss at 1.0960 (40 pips risk) and set a take profit at 1.1120 (120 pips reward). This gives you a 1:3 risk-reward ratio. When the price reaches 1.1120, the position automatically closes for a 120-pip profit. Without a take profit, you might hold too long and watch the price reverse, turning a winner into a loser.
Take profit orders enforce trading discipline by removing the emotional element from exit decisions. Without predefined exits, traders often fall victim to greed (holding too long hoping for more) or fear (closing too early and leaving profits on the table). Take profit levels are essential for calculating risk-reward ratios, which are a cornerstone of any profitable trading strategy.