Stock Market Glossary
Take profit
Pre-defined profit target at which a position is automatically closed.
In brief: Pre-defined profit target at which a position is automatically closed.
Meaning in practice
A take profit disciplines the exit and prevents book profits from disappearing again due to greed. It only makes sense in conjunction with stop loss and position size, because the relationship between target and risk has a strong influence on the expected value.
Context for investors and traders
For traders, this term is most useful when preparing and executing an order. Its meaning depends on the venue, liquidity, time frame and order type. A single reading is not a reliable buy or sell decision.
How to use this in practice
In practice, the term should be linked to a specific trading plan: entry, exit, position size and costs belong together. In short time frames, spread, slippage and delayed execution can quickly outweigh the theoretical benefit of an observation.
What to keep in mind
Write down which observation confirms or invalidates your assumption before trading. This keeps the term a decision-making tool rather than a retrospective justification for risk already taken.
