ARMFTake-profit
A take-profit is an order to close a position at a profit once a set price is reached. Together with the stop it defines the ratio of risk to reward, that is, it defines what win rate a system needs to come out in the plus. That is why the target is chosen before the entry and not «by feel» while in the position.
Take-profit and stop-loss: two halves of one decision
The stop answers for how much a mistake costs. The take answers for what that mistake is allowed for. On its own neither of them tells you whether the trade is worth opening; together they give the ratio from which the break-even win rate follows.
| Risk-to-reward ratio | Break-even win rate | What it means in practice |
|---|---|---|
| 1 to 0.5 | 66.7 % | You have to win two trades out of three just to break even |
| 1 to 1 | 50.0 % | Exactly half of the trades in the plus — and the result is zero |
| 1 to 2 | 33.3 % | A third of winners is enough for the system not to lose |
| 1 to 3 | 25.0 % | Every fourth trade in the plus pays for the other three |
| 1 to 5 | 16.7 % | One out of six — but such targets are reached more rarely |
The break-even win rate formula: 1 ÷ (1 + R/R). It does not account for the spread and the commission — with them the required share of winners is always slightly higher. That is exactly why a ratio of 1 : 1 is a losing one in practice: costs make it a little worse than break-even.
Where the target in pips comes from
Three approaches that give a checkable level, and one that does not.
The target is set before the level where a reaction is likely — with a small step inwards. The logic is the same as with the stop: the target goes where the move is most likely to stop.
by structureA target at 2R or 3R from the entry. A simple way to keep the ratio you need, but it ignores the structure: the target may land right beyond a strong level.
by riskThe height of the range or of the previous wave is projected from the breakout point. It gives a target tied to the scale of the move rather than to your risk.
by projectionNot a target but the absence of one. The ratio of risk to reward becomes unknown and the statistics of the system incomparable between trades. The manageable version of this approach is a trailing stop with a written rule.
does not workPartial closing in forex: what it does to the statistics
Closing half of the position at 1R and moving the stop to break-even on the remainder is a popular scheme. It does reduce the share of losing trades, but that is not free, and the price is worth understanding in advance.
This is checked only against your own statistics: you have to count the average result in R under both schemes on the very same trades. For that the journal has to store not just the result but also the maximum move of the price in your direction before the close.
The further the target, the more rarely it is reached
The ratio of risk to reward is easy to improve on paper: it is enough to push the take further away. The problem is that the share of trades reaching the target falls together with the distance, and the product of those two values changes in a way you did not want.
| Target | Assumed share of reaching it | Expectancy at such a win rate | Comment |
|---|---|---|---|
| 1R | 55 % | +0.10 R | Frequent closes, expectancy rests on the win rate |
| 2R | 38 % | +0.14 R | A working compromise for most systems |
| 3R | 28 % | +0.12 R | Almost the same expectancy with half as many winners |
| 5R | 15 % | +0.05 R | The result is made by single trades |
The shares of reaching the target in the table illustrate the relationship rather than measured statistics: the particular values are different for every system and are counted from the journal. The point is in the shape of the relationship: the expectancy grows up to a certain distance and then starts falling.
From there comes a practical way to choose a target: not «set 1 : 3 because that is the advice», but take from the journal the distribution of the maximum move of the price in your direction and see at what distance the share of hits falls faster than the reward grows.
Frequently asked questions
What is a take-profit in simple words?
An order placed in advance that closes the position when the price has reached the planned profit. It is executed automatically and spares you the decision «bank it or wait» at the moment the trade is in the plus.
Is it obligatory to set a take-profit?
Not obligatory, but then the exit rule has to be a different one and just as definite — a trailing stop or a close on a signal, for example. The absence of any exit rule means the ratio of risk to reward of the system is unknown, and so its expectancy cannot be assessed either.
What ratio of risk to reward is considered normal?
1 : 3 is often named, but that is not a universal standard, it is a compromise: the further the target, the more rarely it is reached. A system with a ratio of 1 : 1 and a win rate of 60 % is more profitable than one with 1 : 3 and a win rate of 25 %. What you have to look at is the product, that is, the expectancy, not one of the numbers.
Can the take-profit be moved further away if the move is strong?
It can, if that is a written rule of the system rather than a choice made on the spot. The manageable form of such behaviour is a trailing stop: it lets the target go further away but locks in the distance already covered.
Can the take-profit and the stop-loss be placed at the same time?
Yes, that is the standard OCO mode: the execution of one order cancels the other. In most terminals both levels are set right in the position-opening window, and that is the right moment — both numbers are known before the entry.
How do you count the take-profit in pips?
From the distance to the stop. With a stop of 40 pips and a target ratio of 1 : 2 the take is set 80 pips from the entry. If the nearest logical level is closer, the ratio will be worse than calculated, and that is a reason to reconsider the trade rather than to move the target beyond the level.
Should the spread be taken into account when setting the take?
Yes, especially on short targets. A take on a buy is executed at the bid price, while the entry was at the ask: the actual profit is smaller than the nominal one by the size of the spread. On a target of 20 pips a spread of 1.5 pips is 7.5 % of the result.
What do I do if the price almost reached the target and turned around?
Decide in advance what counts as «almost». A practical option is a partial close at an intermediate level or a trailing stop after a certain distance has been covered. A decision made in the moment destroys the statistics: the trades stop being comparable.
Does the swap affect the choice of target for a medium-term trade?
It does if the position is held longer than a day. A negative swap holds back part of the profit every night, so the target has to cover not only the spread and the commission but also the charges expected over the planned term.
Can the take be set at round numbers?
It can, but with a small margin inwards. Round levels are places where orders cluster, and the price often turns around a few pips short. A target set slightly closer than the round number is filled more often.
Is it obligatory to close the whole position at once?
No, but the scheme has to be written down before the entry. A partial close raises the share of non-losing trades and lowers the average R at the same time — which of the two outweighs the other is visible only from a journal with a «maximum move of the price» field.
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