In this article, I would like to talk about take profit (t/p), consider options for how to set take profit correctly, depending on the chosen instrument. Just like stop loss, take profit can be set to a fixed value or mathematically calculated.
Take profit is considered more flexible compared to moose, because it should not always be set, for example, in scalping strategies.
Most intraday or medium-term traders do not use a take profit, but a trailing stop, when the stop loss automatically moves with the price, reaching the value set by the trader. However, there are trading tactics that involve setting t/p in order to fix the maximum profit.
How to set take profit correctly
There are a huge number of options for setting take profit, the effectiveness of which must be checked by testing on the history of the price chart. Here we will consider only the main methods that can be applied/modified in your trading system (TS):
- use of support/resistance levels (Support/Resistance);
- Fibonacci levels as an indicator of profit taking.
The methods are quite old and easy to understand. Recommended for beginners!
1. Support/resistance levels
The method is quite accurate and similar to the Fibonacci levels. I use it only to determine the point of setting the take profit.
I recommend that you familiarize yourself with the key rules for their construction. I'll just talk a little about it. Take a look here:
To draw a horizontal line, you need to go to the panel on the left and click on the side arrow. In the menu that appears, select Horizontal Line:
Let's take a segment of the uptrend for gold (GOLD), draw support and resistance lines. The first is set according to the accumulation of lows (preferably by extremes, that is, the shadow of the candle), the second - according to the accumulation of highs. These points (accumulations on an uptrend) will be an indicator for setting a take profit. In details:
The price of 1780.13 is the price support level. This is the entry point to the market - open a market or pending order to buy, take profit is set at the nearest resistance 1808.59;
According to the screenshot, the price has broken through 1808.59, which means that this level becomes a support for it. Therefore, one more order to buy can be opened with take profit at the next resistance level 1828.17. This level is also broken and we set t/p at 1853.86;
As a result, the price bounces from the maximum level (resistance) and goes to correct (rolls back). Here I would open a market sell / pending order with a take profit around 1886.08, located at the support line number 5.
Let's look at a longer period of time:
The chart shows that the price rebounded from the indicated levels several times. In accordance with the principle of “history repeats itself”, it will continue to do this, which means that these levels are the most optimal for placing an order for a broker to take profits!
2. Fibonacci levels
This tool is incredibly versatile! Based on it, there are a huge number of TS, many traders use it as an indicator of the purpose of price movement (especially in wave analysis - Elliot waves). The principle of operation is based on the golden ratio.
In addition to Fibonacci levels, there are also fans, arcs, and Fibonacci expansion. But these tools are less common among traders. However, I would recommend that beginners familiarize themselves with them, understand the principle of their work, since they can also serve as target points for setting a profit.
In my article, I will only consider fibbonacci levels, and for clarity, I will take the hourly chart (H1). It is optimal to use it on timeframes from H4 and higher in order to avoid market noise.
Take a look at the screenshot:
To build Fibonacci levels, click on the corresponding icon on the control panel:
If the trend is up, then the levels stretch from the very low to the very high. When descending - vice versa.
Once you build the grid, you will see the same support/resistance levels mentioned above. They will be the points for placing an order to close the deal in order to lock in profits.
There are times when the price breaks through several levels at once! How you can make money on this, having received the maximum profit, I will tell you next time.
You can also see that once it breaks the resistance level, it becomes support for the price.
By the way, there are indicators, capable of automatically building Fibonacci levels.
Take profit on the example of a strategy
Consider one of the strategies that is suitable for beginners. It can be used both for intraday trading (from H5 to H1) and for medium-term trading (H4-D). Take a look at the screen (Gold). M5 chart, so you should not catch big movements:
Tool: Moving averages (moving average - MA) - 2 pieces with periods: red 30, blue 50, ouset for both 5. (Changes are introduced in the settings).
Long point (buy) - the red one crosses the blue one from the bottom up and at the opening of the next candle, we open a deal (a market or pending order for the maximum of the candle that gave the signal of the intersection)
Short point (sell) - the red one crosses the blue one from top to bottom and at the opening of the next candle, we open a deal (a market or pending order for the minimum of the candle that gave the signal of the intersection).
Take profit: set in the area of the nearest support/resistance level.
Exit the trade: by take profit, elk or candle crosses the red line: in case of buying from top to bottom, selling - from bottom to top. Closing is done manually.
As it was said, there are many options for setting the take, some of them are not even worth spending time on. Although, for example, you can study Pivots (the same support and resistance levels, only built on other points).
Important when setting take profit
I'll give you a couple of basic recommendations:
- we set the take profit not at the very level or behind it, but a few points below the extremum (for example, by the size of the spread);
- do not open a trade if the loss-profit ratio is less than 1 to 3 (for example, the moose is 30 points, and the take is only 10). Otherwise, the expectation will be negative;
- take into account the spread and slippage of the broker (consider the case, the entry point is 1.3950, the take profit order is 1.4000, the spread for the instrument is 3 points, which means that your trade will close not at 1.4000, but at 1.4003. Do not be surprised if the price reaches 1.4000, and the trade does not close ).