Today we’ll discuss how to choose a perfect place for a Take Profit and find out a few more methods to protect the earnings.
Let's start with the main thing - what is Take Profit and how to set it. It is a pending order that automatically closes your trade when the price reaches a specified level. Several advantages of this tool:
- Even if the price has reached the level just for a second and then started to move against you then you will still make a profit.
- The emotional factor is excluded. Your profit will not be at risk due to potential errors because of greed.
- An order is triggered automatically so you don’t need to monitor your trade in order to protect your profit.
You can choose between the two ways of setting Take Profit in MetaTrader 4:
- While making your order. To do this, you need to specify the desired price in the Take Profit field before clicking the Buy or Sell button. It should be higher than the entry price for a buy order and lower for a sell order.
- Make corrections for an open position. If there is high volatility in the market and you are afraid of requotes and slippage, then you can open a position and set the Take Profit later. Right-click on the required transaction and select “Modify or delete order” in the drop-down menu. In the pop-up window set the Take Profit level you need.
How to Choose the Take Profit Level
The place where you set your Take Profit depends on your trading strategy and risk management system. Let's look at the main ways to determine the required level.
Key Price Levels
Price often returns to determined support and resistance levels. Use the key price levels to set your Take Profit level. You can’t be sure whether the price will break through the resistance or support, therefore it is better to take your current profit, and in case of a breakout, open a new trade with a new Take Profit level.
Fibonacci Levels
This principle is similar to the previous one. Simply use the Fibonacci indicator that you can find directly in MetaTrader 4. The lines of this tool show potential levels for price correction based on the previous trend. It will be optimal to set Take Profit on a line that matches key price levels or round numbers that we will talk about in the next paragraph.
Round Levels
It is in human nature to round everything. That is why traders often close trades precisely at round prices such as 10, 20, 50. This affects the movement of the market. That’s the reason to use the round numbers as your Take Profit levels.
Risk-to-Reward Ratio
If you have already set a risk-to-reward ratio for yourself, then you can set the Take Profit level based on the chosen Stop Loss.
For example, if you use a 1:3 ratio and set Stop Loss at 10 points from the entry point, then Take Profit needs to be set at 30 points from the same point, but in the opposite direction.
Previous Swing
The market is moving in waves and forms swigs on the chart. Some traders set Take Profit based on the length of the previous swing. In this case, the length of the last swing is measured in points and the TP level is set at approximately the same interval from the beginning of the next swing.
Fixed
Some traders prefer to set a specific Take Profit level in points. That is 10, 20, 30 points from the entry point, regardless of other factors. This method doesn’t take into account any technical or fundamental factors. That is why it is not an optimal solution. Use it only as a last resort.
Volatility
Not the most common option either. It should be used if you have no other options. What you’ll need is the average volatility of your currency pair. Let’s say, the volatility of the instrument is 70 points per day and the instrument has passed 30, then Take Profit is set at 40 pips from the entry price.
Manual Closure of Positions
If you monitor your trades then you can determine the optimal moments for leaving your positions in the process. To do this, you need to follow certain signals in the market.
Overbought or Oversold
Changes in these levels often indicate a possible change in the direction of price movement. To determine the overbought/oversold levels, you can use special indicators, such as RSI. If the level in the indicator approaches 70 or 30, then it indicates a possible reversal. To protect your profits, you can manually close the trade.
New Highs or Lows
If you notice that the chart formed a new high or low, and then the price moved in the opposite direction, then it is worth considering to close your trade. There is a chance that the chart will continue to move against you and close at Stop Loss. Try to protect the profit that you have already made.
Big Candle
A large candle often leads to a significant price correction. If you notice it on a chart, then this may be a signal for you to close your position.
How to Protect Your Profits
The best option is to thoroughly develop a risk management system and set a Take Profit level on its basis and on the basis of current technical analysis. Since this also doesn’t give a 100% result, it will be wise to periodically monitor your positions and act on the basis of new signals.
And of course, it is best to use a combination of several methods at once. Signals confirmed several times give the highest chance of a positive outcome.