The reverse of a stop-loss order is the take-profit order, and Christopher Lewis of Forex.com offers tips on its best use.
When forex traders place their trades, the majority of them have no idea what their final destination is as far as price. Because of this, there is a certain set of situations that dictate whether or not you may want to place a take-profit order when trading forex.
One of the most common reasons to place a take-profit order is that you expect the market to put up a fight against your position at a certain area. For example, you may find that there is a massive resistance area up ahead on your buy order that will more than likely give you trouble. When you can clearly identify this, you may want to put in a take-profit order.
One of the biggest determining factors of whether or not you might place one of these orders is if you are trading with the overall trend or against it. If you are trading with the long-term trend, a take-profit order may not be wise as it will possibly cut profits before the move is over. In fact, when trading with the trend—the wisest choice is to let the trade run as far as you can. If you are taking profits at a particular level, you are prohibiting the trade’s full potential.
If you are trading against the trend, a take-profit order makes perfect sense as the prevailing trend tends to hold up over time. Because of this, you might face extra resistance against your position when approaching these areas. It is a simple matter of the full force and weight of the market working against you. When trading against the trend, you are better off to take your profits and get out while ahead as trends tend to last for years in the forex markets, and moves can suddenly happen in their favor.
When placing a take-profit order, you are limiting the potential returns on your trade. There is no real way around that, and as such it is something you need to think about. While they do have their place, they should only be in specific situations where you are trying to get quick profits and out of the market as rapidly as possible. When you are trading with the overall move, you owe it to yourself to allow the trade to develop over the long haul. By keeping this in the back of your mind, you will find that you should be able to stay on the right side of the fence when it comes to these orders.
Christopher Lewis, Contributor, Forex.com