An order that automatically closes your trade at a predetermined price to lock in gains.
A take profit (TP) order is the mirror of a stop loss. It automatically closes your position when price reaches your profit target. The distance between your entry and take profit defines your reward. Combined with your stop loss distance, it determines your risk–reward ratio.
Take profit orders enforce discipline on the exit side. Without a target, traders either exit too early out of fear or hold too long out of greed. A predefined TP ensures you capture the move you planned for and makes your strategy’s risk–reward ratio measurable and repeatable.
You buy at $50 with a stop loss at $47 (risk = $3) and a take profit at $56 (reward = $6). This gives you a 1:2 risk–reward ratio. When price hits $56, your position automatically closes with a $6 per share profit.
Take profit at $56 locks in a $6 gain versus the $3 risk (stop loss at $47), creating a 1:2 risk–reward ratio.