Bracket Order - Meaning and Examples
A bracket order combines a target order, an initial order, and a stop loss order. In this order, when you place the initial order, you simultaneously bracket it by placing a square-off order (which books profit) and a stop-loss order (which prevents losses). Let us elaborate more on what is a bracket order.
A bracket order comprises the following three order types:
This order specifies the initial position created with this limit order.
This order specifies the price at which a trader wants to close the position and collect profits.
Stop Loss Order:
This order is designed to close the position and limit losses if the trade becomes unfavourable.
Two opposite side orders are placed simultaneously to bracket your order when you place the initial order. So, if your initial order is a buy order, then your order will be bracketed by a sell limit order priced above the buy order and stop-loss orders priced below your buy order. Now, if the initial order is not placed, the bracket orders are cancelled by your broker because you cannot carry forward bracket orders to the next trading session. It is due to this reason that bracket orders are one of the most sophisticated order types – they use trailing stop losses and auto cancellation. However, you can cancel these orders without paying the penalty only if your initial order has not been carried out. But this depends on your broking house.
Benefits of Bracket Order
Bracket order trading provides a lot of advantages. You can guard against losses and lock profits by bracketing your order with three orders. It ensures that once you hit the stop loss order or reach the profit target, the other orders get cancelled automatically. Some brokerages also provide a trailing stop loss feature – it ensures your stop loss orders trail the current market price.
Bracket orders also limit your risk, as there is always a stop loss order along with every trade you make.
Consider the following Bracket order example: You've held 1,000 shares of a company for a while and anticipate some threat. You might enclose your entire position in a bracket or just a portion of it, such as 300 stocks. You don't have to carry out that action for all stocks. In any case, bracket orders offer automatic risk management for your open slots. Moreover, traders have more influence over realizing profits.
Plus, you can set the bracket order before or after a trade is executed. For example, assume you have analyzed a stock and know where to place stop loss and sell limit orders. And you have made the trade. But if there is some unexpected news or announcement about the company and you are unsure how the stock price will react, you can always include a bracketed order to the existing open position.
Bracket Order vs Cover Orders
Cover orders are slightly like bracket orders; the difference is, unlike bracket orders, cover orders combine two orders – initial and a stop-loss order. Besides this major difference, cover orders work very much like bracket orders. These orders also use a stop-loss order to close your position when prices move too much in the opposite direction. These orders aim to limit your exposure if the price volatility is high.
Cover orders are also squared off at the end of the trading session. And if the stop loss order is not executed, your initial order gets cancelled.
While bracket orders help you square off a favourable position without micromanaging your orders, you need to have a strong foundational knowledge of the market to pull them off. Knowing momentum oscillators and candlestick charts is essential if you want to square off profitable positions in intraday trading.
Q. Why do cover orders exist?
The cover order has a necessary stop-loss order and the primary order to help prevent losses when the stock price moves too much in an unexpected direction.
Q. How does the stock market use bracket orders?
Three orders—the initial, stop loss, and target orders—are combined to form a bracket order. In this case, the stop loss and target orders bracket the initial order.
Like intrinsic value of a business indicates how much the business would be worth if all assets were sold, the intrinsic value of a share tells investors how much the shares are worth