What Is Bracket Order – A Guide For Traders

The world of stock trading is fast-paced, and every second counts. Traders are constantly on the lookout for innovative strategies that can help them maximize profits and minimize risks. One such strategy that has gained significant popularity in recent years is the bracket order. This powerful tool allows traders to set predefined profit targets and stop-loss levels, effectively automating their trades and taking the guesswork out of the equation. Join us as we dive deeper into the world of bracket orders and explore how they can revolutionize your trading game.

 

 

 

What is Bracket Order?

Bracket Order is a trading strategy used to minimize losses and lock profits during a trading session. It combines a buy or sell order, a stop order, and a target order. These orders are primarily meant to assist stock traders in squaring off their profits or losses by the end of the trading session, and they can only be placed during intraday trading.

Despite the safety net of a bracket order, the trader's position at the end of the day is decided by picking the right stocks and selecting the correct levels of profits and losses. Let’s understand the bracket order in depth:

 

 

How does Bracket Order Work?

The bracket Order consists of three orders in one. One is an initial order placed in sync with the other two orders which are in contrast to the initial order. They can be placed on both buy and sell orders to leverage the favorable position by the end of an Intraday trading session. For instance, if an initial order is a buy order, then the target and stop loss orders will be negative ones and vice versa.

Let’s take three scenarios to understand bracket order better:

A person X places a limit order to buy Y stock for Rs.100/share. This order is placed along with a stop-loss at 95/share and a target at 110/share. In this case, we can see that X's initial order of 100/share has been bracketed with a limit of Rs.5 and Rs.10 to his loss and profit respectively. In this instance two of the three scenarios are likely to occur:

1. Target Order: Once the limit order for Rs.100/share is placed and the stock price reaches X's expectation range of 110, then, in this case, the stock will be sold at Rs.110 and the stop-loss will cease to be canceled.

2. Stop Loss: After reaching the limit order price of Rs.100 if the stock price falls to the stop loss limit of Rs.95 then the share will be automatically sold at this price, and the target order will be canceled.

3. Initial Order: On most occasions, bracket orders are limit orders only, so there could be instances that the share price might not touch even Rs.100, which is the limit order in this instance. In this case, the investor will not be able to purchase the shares in the first place and the order will be canceled.

 

 

Difference between Bracket Order and Cover Order

Bracket orders are more complex than cover orders and allow traders to set both a stop-loss order and a target order. This means that traders can lock in profits if the price of the security reaches their target, or limit losses if the price of the security reaches their stop-loss.

Cover orders are simpler than bracket orders and only allow traders to set a stop-loss order. This means that traders can only limit their losses, but they cannot lock in profits.

Both bracket orders and cover orders are automatically canceled at the end of the trading day if they are not executed. Cover orders cannot be placed for the following trading sessions, while bracket orders can be.

Feature	Bracket order	Cover order
Number of orders	3 (initial order, stop-loss order, and target order)	2 (initial order and stop-loss order)
Purpose	To limit losses and lock in profits	To limit losses
Availability	Can be placed for the current trading session or for future trading sessions	Can only be placed for the current trading session

 

Benefits of Bracket Orders

 

1). Acts as a shield against volatility

The stock market is a volatile place, especially during intraday trading. Here is when a 'bracket order' comes in handy which creates a protective shield around your initial trade. The profit target and stop-loss orders ensure that a trader's profit is ensured, and losses are minimized in a volatile market.

 

2). Saves time and effort

As the target price and stop-loss orders are pre-definitely set in a bracket order and the trading process is automated, it saves the trader from the hassle of continuous monitoring and streamlines the entire process. It makes the trading experience stress-free for a trader and enables him to focus on conducting research and discovering other market opportunities.

 

3). Brings discipline in trade

Novice traders tend to sway with emotions while trading which could lead to some hasty decisions resulting in heavy losses. In bracket orders, there is a pre-set strategy in which traders adhere to the set prices that bring discipline to their trading approach and help them ride the turbulent market waves smoothly.

 

4). Increased Efficiency

Trading requires traders to keep monitoring different positions constantly in order to place the right orders. Setting a bracket order saves traders time to do research and place multiple orders as they aren't consumed on monitoring a single transaction.

 

5). Promotes a more balanced approach

Generally, trading is seen as a high-risk high-reward approach but setting up a bracket approach makes it a more balanced one. Here you have set a preset target and stop-loss price for your profit and the order will be executed once the share reaches either of the price. In this way, you can regulate your losses as well as your profits and will help you sail the market turbulence with ease.

 

 

Conclusion:

Bracket Orders are usually helpful to traders as they enable the automation of trading strategies and risk management. A trader may join a buy order with predefined profit targets and stop-loss levels that can help him/her to trade better without using emotions.

However, it is somehow important to understand how Bracket Orders work and practice with lesser positions before adding to your routine trading strategy.