A take-profit order (T/P) is a type of limit order that specifies the exact price at which to close out an open position for a profit.
Most traders use take-profit orders in conjunction with stop-loss orders(S/L) to manage their open positions. If the security rises to the take-profit point, the T/P order is executed and the position is closed for a gain. If the security falls to the stop-loss point, the S/L order is executed and the position is closed for a loss. The difference between the market price and these two points helps define the trade’s risk to reward ratio.
The benefit of using a take-profit order is that the trader doesn’t have to worry about manually executing a trade or second-guessing themselves. On the other hand, take-profit orders are executed at the best possible price regardless of the underlying secutity’s behavior. The stock could start to breakout higher, but the T/P order might execute at the very beginning of the breakout, resulting in high opportunity costs.
Take-profit orders are often placed at levels that are defined by other forms of technical analysis, including chart pattern analysis and support and resistance levels, or using money management techniques, such as the Kelly Criterion. Many trading system developers also use take-profit orders when placing automated trades since they can be well-defined and serve as a great risk management technique.