7 Best Profit-Taking Strategies In Trading

What are trading take-profit strategies?

When trading, it’s important to manage risk by utilizing the tools available to adhere to a predefined trading strategy. One such tool is a take-profit order. With a take-profit order, the trader specifies a price - higher than their asset’s current price - that they want their held asset to be sold at. When (or if) the price reaches that pre-set value, then the order is triggered and the asset is automatically sold. A take-profit order is so-called because the automatic sale closes the position, allowing the trader to take the profit.

Using take-profit orders is a crucial feature of a disciplined trading strategy with clearly outlined boundaries. Take-profit orders allow traders to lock in profits by securing gains, employ discipline to avoid emotional trading, and manage their risk by automating sales.

Though the act of setting a take-profit order is relatively simple, the tough part is deciding on what value the order should be. If you set the limit order too high, you risk losing any initial gains. Set it too low, and you might trigger the sale prematurely, limiting your opportunity for further profits. So how do you decide?

There are seven methods for calculating your take-profit levels that we will look at. Each strategy has varying suitability, largely depending on your trading style and financial goals. The seven we will look at are:

1. Percentage-Based Take Profit

2. Fixed-Pip Take Profit

3. Average True Range (ATR) Take Profit

4. Technical Analysis Levels

5. Trailing-stop

6. Time-based

7. Fundamental-based

These take-profit strategies are applicable to Forex and stock trading. Although we will focus mostly on Forex here, the same logic can be applied when trading in other financial markets.

Percentage-based take-profit

Choosing a take-profit level based on a percentage of the entry point value is perhaps the most simple and straightforward strategy to use. It involves setting a target profit at a specified percentage above the value of the position that you open. For example, if you open a trade at $100 USD, you could set the take-profit at 10%, which is $110 USD.

Example: Let’s imagine you’re aiming for a 5% profit in Forex trading. If you were to buy EUR/USD at 1.1250, you would set your take-profit at 1.1813, which is 0.0575 (5%) higher than your entry point. This approach has its advantages and disadvantages.

Fixed-pip take profit

Much like using percentages, using a fixed-pip take-profit strategy is relatively simple. With this approach, you set a fixed number of pips above your entry point to determine where to set your take-profit level.

Example: Set a 100-pip take profit for EUR/USD bought at 1.1250, so your target is 1.1350. For example, if you buy EUR/USD at 1.1250, setting a 100-pip take profit would mean aiming for 1.1350.

Average true range (ATR) take profit

The Average True Range (ATR) Take-Profit strategy leverages the ATR indicator to measure market volatility and adapt to price fluctuations. The ATR indicator is a moving average of the true ranges, typically from the past 14 days, and is made up of: the current high minus the current low, the current high minus the previous close, and the current low minus the previous close. It calculates the average range between high and low prices over a specified period to gauge volatility.

The ATR take-profit approach uses a multiple (typically 2 to 3 times) of the ATR indicator to determine what level to set the take-profit at. For example, let’s say you opened a position on the USD/JPY pairing at 144.736. Using the ATR indicator on a 1-hour candlestick chart, you find a 14-day ATR value of 0.325. Multiplying this by 3 gives you a value of 0.975, which is equal to 97.5 pips. So, you set an ATR take-profit level of 145.661.

ATR indicator for USD/JPY on eToro

There are benefits and challenges to using the ATR take-profit approach.

Other technical indicators, such as Bollinger Bands, could also be used in a similar way.

Technical analysis levels

Technical analysis is a key component of disciplined and mathematical trading strategies. Likewise, a take-profit order based on technical analysis allows you to evaluate trading opportunities and optimal exit points.

There are several aspects of technical analysis you could use in determining your take-profit level. You can take profits at key technical levels like support or resistance zones or channel lines. You can use divergence signals like the MACD or Awesome Oscillator (AO) to assess a potential trend reversal or weakening trend and decide on the best exit point. You can observe chart patterns like triangles, heads and shoulders, or double tops/bottoms, and use them to determine potential price targets.

Trailing-stop

You may have heard of a trailing stop-loss order. With a trailing stop-loss, the stop-loss order price adjusts if an asset’s value moves upward, staying at a fixed level below the highest price that the asset reaches. A trailing take-profit works by only triggering the stop-loss once a certain profit level has been reached. It is typically used when trading cryptocurrencies.

Let’s say you open a trade worth $200 (on any asset) and set a take-profit of 10% at $220, and then a trailing take-profit of 5%. If the price reaches $210, nothing happens. If the price reaches $220, a stop-loss order is automatically set at 5% below this value, at $209. If the price moves down to $210 again, the stop-loss stays at $209, but if the price moves up to $240, the stop-loss adjusts to $228. It works very similarly to a trailing stop-loss order, except it is only triggered when the initial take-profit level is reached.

Time based take profit

One of the more easy-to-use take-profit setting methods is to simply trigger the sale of an asset when a certain date or time is reached, or when a specific amount of time has passed since opening the trade. This is known as a time-based conditional order. If you want to avoid holding onto a position over the weekend for example, you could set an order that triggers the asset’s sale on Friday evening, but bear in mind – your position wouldn’t be guaranteed to be in the green.

This approach might be useful if you want to limit your exposure to market volatility or are trying to take advantage of specific market conditions that you expect to expire at a specific time. It can also be useful if you want to time your exit when you know a certain market-related event will happen.

For example, Take-Two Interactive, the company behind the famous Grand Theft Auto series, recently announced a trailer for their new game, GTA 6, with the trailer release set for 9AM on December 5th. If you wanted to try to capitalize on the hype surrounding this, you could buy TTWO stocks and trigger the sale of the stocks at the time of market opening (9:30AM) on the day of the trailer’s release.

Fundamental based take profit

Setting a fundamental-based take-profit involves setting exit levels based on fundamental factors affecting an asset, such as company earnings, economic indicators, or geopolitical events. This strategy relies on analyzing the intrinsic value of the asset rather than market trends or technical indicators.

Let’s say you were trading stocks - a fundamental-based take-profit could be triggered by negative news about a competitor's earnings, influencing the perceived value of a similar stock. For instance, if a major competitor of META stock reports poor earnings, you might decide to take profit on META stock, anticipating a potential negative impact on the industry.

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Tips for calculating a take profit

• Don't be greedy: It’s easy for the desire for more profit to cloud your judgment and lead you to set a high-take profit. Be realistic and set a limit that aligns with your trading strategy and is based on analysis, not optimism.

• Account for risk-reward ratio: Whichever take-profit strategy you use, ensure that it offers a favorable risk-reward ratio. This helps maintain a balance between potential profit and acceptable risk.

• Regularly review and adjust: Markets are dynamic, so maintain flexibility by regularly reviewing and adjusting your take-profit levels based on changing conditions. A set-and-forget approach might not be suitable for all scenarios.