Take profit order otherwise known as a TP order is an order that is used to specify the price at which you want the order to be filled or executed. In fact, it is not the generic form of this order.
A take profit order is actually a member of the limit order class of orders. Such classes of orders are used for the specification of the price requested for either buying or selling an asset with a broker.
There are numerous examples of different classes of orders in financial markets. First let’s discuss the idea of class of orders and then we will dive deep into the notion of take profit order and provide a clear example for TP order.
What Are Different Classes of Orders?
Different classes or categories of orders are among the most important notions that you need to know in order to be able to successfully maneuver through the different orders that exist in different markets.
Various orders can be classified and categorized into groups of orders based on a certain feature that they share or an aspect that they have in common.
For instance, at the very top we have the three main categories of limit, stop, and market orders that are considered the cornerstone for all other orders.
Then moving down the line, we have other categories and classes of orders. Such as the conditional group of orders which are consisted of a group of orders that carry a condition with them for the execution of the order.
Then we have for example the group of orders that fall under the category of limit orders. Limit orders, by and large, are orders by which the trader can specify and request a certain price for the filling of the order. In these situations, the trader requests a specific price for the order or a better one for the execution of it.
And this is exactly where we find ourselves with the take profit order. Now let’s go through it and see what this order really is.
What Is the Definition of a Take Profit Order?
As we mentioned above, all limit orders are basically a way for traders or investors to specify an exact price for their order with their brokers. So what is so special about the take profit order?
The distinguishing feature of the take profit order is that traders can actually specify the price at which an open position can be closed that results in profit.
Now when you decide on a certain price for your open position, it is a directive to the broker to close your position at that price and only at that price.
Traders can use various methods and tools to specify the proper level for profit. Such methods could include technical analysis and fundamental analysis. Whatever method you might use; you get to define the level of profit that you want for a certain open position. And once that level of profit is reached, your order is filled. Of course all of this depends on market conditions and price movements.
So chances are your requested price might not get hit. In those situations, your order is not filled and would be canceled by the broker.
But is that even an option? The short answer is yes. But let’s see how.
Can Brokers Cancel Orders?
When you place an order with your broker, there is no guarantee that your order will be filled. So yes, brokers in fact have the right to cancel your order if the criteria defined by you are not met.
The chances of your order being canceled depend wholly upon the type of order that you have issued. So the percentage is actually not the same for all order types.
There are certain order types that provide a higher degree of freedom and control to the broker, so they can fill your order with more ease. For instance, they can partially fill your order with what is known as partial fills.
But there are certain orders that do not allow for partial fills. There are other orders that have a limitation and constraint with regard to the time of the order being filled or the price at which the order ought to be filled.
These orders include immediate or cancel, all or none, take profit, and many other orders that have a specific condition with them for the broker. So in case those conditions are not met, the order will be canceled by the broker.
It is up to you as a trader to weigh different orders and see which one fits your situation best.
Now we shall take a look at how the take profit order functions.
How Does the Take Profit Order Work?
In many situations two orders are used in combination in order to improve chances of a successful trade. In the case of the take profit order, traders usually use it together with a stop loss order. Of course in this way, both ways of the market are covered.
This means, if the prices rise to hit the profit levels defined through the take profit order, then of course the order is filled having hit the profit goals.
On the other hand, if prices fall, the position will be hit by the stop loss order, and even though the position will result in losses, further losses will be prevented using this order.
The biggest advantages of the take profit order are that you do not need to worry about constantly monitoring and observing the market. So you can simply set a take profit order and hope for prices to hit your profit goals.
However, there is a downside if things turn out too optimistic. If indeed prices are going to rise higher and higher, you take profit order as merely a portion of the profit that can be gained through the position. So in that situation, even though your position ends with profits, you actually miss out on much higher profit potentials.
An Example of the Take Profit Order
Before we provide the example, do keep in mind that when you want to place any order, including the take profit order, you actually need to go through the whole rigmarole of analyzing the market.
So supposing that you have fully analyzed your situation and further supposing that you have indeed identified an uptrend in the market or a breakout toward an uptrend, you decide to take a long position with whatever asset you might be trading, such as foreign currency pairs in the forex market.
When you take the long position, you already predict that prices are going up, remember you already did the analysis, so you place a take profit order with your broker.
Now depending on your own analysis, you can place this order at whatever price you deem to be ideal for profits. For instance, you can place it 10% higher than the currency market price.
And when the asset at hand hits that level, your position is closed automatically by the broker and you have pocket the profit.
The take profit order is a type of limit order with the help of which you can specify a price target for your position. The special feature of the take profit order is that it can help you define the profit levels for your position. And when the profit levels are hit, your position will be closed, resulting in profits in the exact amount or percentage you requested from your broker.