Where To Place Your Take Profit Orders When Trading Forex
When you’re entering a trade in the forex market, you need to have a fairly good idea of where you’re going to exit the trade if it moves in the right direction. Finding reversal points in the market isn’t the hardest part of trading, but squeezing every last pip out of a trade requires a huge amount of skill!
So, in this article, we will look at your options when it comes to where you should be placing your take profit in forex trades!
Where Should You Place Your Take Profits In Forex Trades?
Placing a take profit within the forex market is actually incredibly complex, and you have a huge number of options to test and consider. Your decision of where to place your take profit in a trade will greatly affect your profitability and win rate. This makes the difference between a profitable trading plan and an unprofitable trading plan!
You need to squeeze as many pips as possible out of a trade to give yourself the best risk to reward ratio. You need to hold runners for as long as possible to milk the market for profits whenever you can. This all must be done whilst having conservative enough take-profits to actually lock in winning trades without giving all of your floating profits back to the market when it reverses.
This is what sets apart some of our Elite Trading Club Traders, the ability to hold trades just as long as they can before the market reverses against them.
So, let’s take a look at our options.
Option 1 – Fibonacci Extensions
Many traders like to use Fibonacci levels to help guide them in setting take profits within their trades. The reason for this is the simple fact that it does not rely on any price action to form within the markets, meaning it can be applied to every single trade! When you can apply the same take profit logic to every trade, you have a system that can be automated and back tested. This is something that a large amount of our prop firm funded traders do to validate their edge within the markets.
Option 2 – Swing Highs & Swing Lows
Taking profits on swing highs and swing lows is typically one of the most popular approaches for setting targets within the markets. Firstly, they’re obvious and easy to find, meaning you’ll never be guessing within a trade whether you should place your take profit here or there. Secondly, at some point, the market will always break highs and lows. If the market never broke these areas, the market would consolidate forever – which we know does not happen. Hence, why it could be a good place for placing your take profit. The only issue to consider is the fact that price can sometimes reverse sharply from these levels.
Option 3 – Support & Resistance Levels
There is certainly a use case for taking profits from your trades when price reaches support and resistance levels in the market, as these can sometimes lead to reversals in price! There are a few drawbacks to this approach, though. Firstly, support and resistance levels are typically very discretionary. This means that you could draw a level at 1.41, and I’ll draw a level at 1.39 on the exact same chart. This makes it incredibly hard to back test and prove your edge in the markets, as you’ll see a different level every time you look at the markets!
Secondly, due to being so discretionary, these levels rarely hold price and can often lead to trades closing positions too early without being able to realize their full profits.
Option 4 – Based On Structure Breaks
When setting take profits, some traders take an entirely different approach and don’t set a take profit at all. Instead, they use their stop loss as a take profit. This is done by trailing your stop loss as the market pushes into profit, based on the swings in the market. For instance, in the GBPUSD example above, you can see the market was consistently making higher lows. You would keep in this trade for as long as possible with no take profit set. Each time a new high is created, you move your stop loss up to the previous low. When the trend reverses and the low is finally broken, you’ve still managed to take as many pips as possible out of the market.
The only issue with this approach is the fact that it takes a lot of manual effort to keep monitoring and moving your stop loss accordingly. This method of placing your targets has led to some of our funded traders taking fairly large profits out of single setups.
Option 5 – EMA’s
The Exponential Moving Averages or EMA’s can be really useful for selecting a take profit within a trade if you’re struggling to locate an area of price! The reasons for using the EMA’s are simple. Firstly, there will be an EMA to target in every trade you ever take. This works best for pullback or counter trend trades as there will be a sizable gap between current price and the EMA, giving you room to take profits.
Secondly, in theory, using very basic logic, price will always meet the EMA again. If you take a look at the market, you’ll see the price always touches the EMA again as it catches up to price. Therefore, you’ll always have a target.
Granted, it’s not as simple as I’ve made it sound, but many traders take profit on the EMA’s for counter trend plays!
Option 6 – In Relation To Stop Loss Sizes
Another great way to set take profits for forex trades is to use a take profit that is completely in relation to your stop loss.
For example, you set your stop loss at an extension on the Fibonacci or at a previous swing high/low. Out of a trade, unless you’re a high-frequency trader, you’re going to be wanting at least a 1:1 risk to reward. Meaning, for every £1 you risk in the trade, you should be netting £1 profit. Ideally, this would be 1:2 or higher, but it really depends on your trading strategy and win rate. You could calculate the pips needed to hit your desired risk to reward ratio and place your take profit there in the trade! This is often done by automated traders as it removes the need to use technical analysis for the take profit placement.
Option 7 – Time Duration
Some traders, mostly algorithmic traders, like to set take profits for trades based on time durations. This typically works best if you’re trading candlestick patterns on the higher time frames. For example, your strategy may involve the ‘morning star’ candlestick formation on the daily time frame. You may know that there is a higher chance of the market rising for the day following this setup, than falling. This is where your edge comes from. In this scenario, setting your trade to expire and close after 1 day is a great idea!
This can also be applied for intraday traders. Many trades with tight stop losses on the lower time frames get taken out during ‘spread hour’ and result in big losses for intraday traders. Having your trades expire before this hour can be a great idea to avoid any losses or slippage.
In Conclusion – Where Should You Be Placing Your Take Profits In Trading Setups?
In summary, there are plenty of different options for placing your take profits in a trade – keep it simple and keep it objective would be our advice! Don’t let greed get in the way of your trading. Take a sensible amount of the market, without holding just for the sake of ego!