How To Calculate A Take Profit When Trading?

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Each of the seven take-profit strategies has its advantages and disadvantages, and varies in suitability for different trading styles. The seven main strategies are:

Percentage-Based Take Profit: At a fixed percentage above the entry point
Fixed-Pip Take Profit: At a fixed number of pips above the entry point
Average True Range (ATR) Take Profit: A value 2-3x the ATR indicator value
Technical Analysis Levels: Based on key support and resistance levels
Trailing-stop: A dynamic take-profit order that increases with the asset’s value
Time-based: Triggers the sale at a specified date or time
Fundamental-based: Closes the position based on market news or events

An integral aspect of being a successful trader is making sure that you have a clearly defined strategy, adhering to the approach that you have predefined in every trade. Using take-profit (TP) orders is a key component of a well-planned trading strategy – though it can be challenging to know what level to set your take-profit at. In this article, we look at seven different approaches to setting your take-order, examining the pros and cons of each one and explaining how to use them.

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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:

Percentage-Based Take Profit
Fixed-Pip Take Profit
Average True Range (ATR) Take Profit
Technical Analysis Levels
Trailing-stop
Time-based
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.

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.

The percentage-based approach is easy to understand and implement. It’s consistent and lets you apply a standardized approach across different trades. It’s also simple, making it suitable for beginner traders. Using a percentage also accommodates varying account sizes as it is proportional.

Using a one-size-fits-all percentage-based approach overlooks the distinct characters of each asset, such as volatility or price behavior. They are also not tailored to specific market conditions. Using percentages also does not account for fundamental analysis.

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.

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.

This method provides consistency and clear profit targets, making it particularly suitable for range trading strategies where price movements are confined. It is also simple to apply, making it attractive for beginners.

However, it comes with the drawback of potentially missing out on more substantial profits during positive trending market conditions, and it lacks the ability to adjust to changing levels of volatility.

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.

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

It adjusts to market volatility, allowing for dynamic profit-taking based on current market conditions. An ATR-based take-profit is also flexible and adaptable for changing markets and different trading styles.

Setting a take-profit based on ATR can be quite complex for beginners compared to using fixed-value methods. It can also be influenced by short-term market noise, which could lead to take-profit values being set too low and prematurely triggered.

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.

Using technical analysis for take-profit can enhance your overall strategy by incorporating technical analysis principles. Additionally, it can lead to profitable exits by leveraging identified technical levels.

The downside is that you need a solid understanding of technical analysis, which may be a steep learning curve for some traders. Furthermore, the subjective nature of interpreting indicators and patterns may result in missed opportunities or premature exits.

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.

It adjusts to changing market conditions and captures additional gains in trending markets. Trailing take-profits lock in profits while allowing flexibility for potential upward movements.

Using a trailing take-profit requires understanding and monitoring market dynamics to optimize results.

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.

The set-and-forget approach of a time-based strategy enforces disciplined trading without constant monitoring. It also prevents the temptation to constantly adjust take-profit levels, reducing the risk of impulsive decisions.

However, market unpredictability could lead to exits without profit, and a fixed time frame could cause you to miss out on potential profits.

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.

Using fundamentals for setting take-profits aligns with long-term investment strategies, and is based on tangible factors that can affect the value of the traded asset.

The in-depth understanding of fundamental analysis required for this approach can make it quite difficult to use. Additionally, market reactions to fundamental events are not always straightforward and can lead to unpredictable events.

Best Forex brokers

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.

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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.

Conclusion

Mastering take-profit calculation is essential for successful trading, as it determines your ability to lock in gains while minimizing risk. TU's comparison of seven different strategies highlights that there’s no universal solution—traders must adapt their approach to their style, market conditions, and objectives. For example, a fixed-percentage method offers simplicity, while trailing stops provide flexibility in volatile markets. Ultimately, the most powerful takeaway is that a disciplined, well-chosen take-profit strategy not only protects your profits but also instills trader confidence. Remember, consistent execution of your exit plan often makes the difference between fleeting wins and long-term trading success.

FAQs

How can aligning take-profit strategy with trading style enhance trading outcomes?

Selecting a take-profit method that matches your trading style—such as scalping, day trading, or swing trading—improves discipline and consistency. For example, fixed-pip or percentage-based targets work well for short-term traders seeking quick gains, while fundamental or technical analysis-based exits suit traders who hold positions longer and rely on deeper market evaluation.

What factors should be considered before choosing between automated and manual take-profit orders?

When deciding between automated and manual take-profit orders, consider factors such as your trading experience, market monitoring ability, and emotional discipline. Automated take-profit orders provide consistency and reduce emotional decision-making, while manual orders offer flexibility to adapt to evolving market conditions if you can closely monitor trades.

How often should traders review and adjust their take-profit levels?

Traders are encouraged to regularly review and adjust take-profit levels to account for evolving market conditions, volatility, or changes in their financial goals. Staying flexible helps ensure that profit targets remain relevant and aligned with the current trading environment.

Are take-profit strategies equally applicable across different markets, such as stocks and forex?

The core concepts behind take-profit strategies can be applied to both forex and stock trading. While the article focuses on forex, methods like percentage-based, fixed-pip, ATR-based, and technical or fundamental analysis-based targets can also guide profit-taking in stock and other financial markets, with adjustments to fit each market's unique characteristics.

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Team that worked on the article

Jason Law is a freelance writer and journalist and a Traders Union website contributor. While his main areas of expertise are currently finance and investing, he’s also a generalist writer covering news, current events, and travel.

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Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK.

Tobi Opeyemi Amure is an editor and expert writer with over 7 years of experience. In 2023, Tobi joined the Traders Union team as an editor and fact checker, making sure to deliver trustworthy and reliable content.

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