Bracket order is an intraday trading strategy where traders place a buy or sell order with a stop-loss and a target price. You can’t use bracket orders for regular trading. Traders use a bracket order to facilitate automatic squaring off at a favourable price level at the end of a trading session. However, the order’s outcome depends on the stock selection and the price levels selected.
What is bracket order?
As the name suggests, a bracket order combines three orders in one. It includes the original buying or selling order, an upper target, and the stop-loss limit. Simply put, it brackets your order.
Intraday traders use a bracket order for both buying and selling stocks.
When you place a bracket order, three scenarios can occur. Let’s see them one by one.
You bought stocks for Rs 100 per share and placed stop-loss and target levels at Rs 95 and Rs 107, respectively. Two upper and lower price limits bracket the original order. At any trade, only one price level will get executed.
Scenario 1:
If the share price rises to Rs 107, the upper limit gets executed, and the stop-loss gets cancelled.
Scenario 2:
In an opposite situation, if the share price falls to Rs 95, the stop-loss is applied, and the upper limit gets cancelled.
Scenario 3:
In a third scenario, the actual order might not get placed. A bracket order is a limit order, and there is a chance that the share price doesn’t reach the original price level of Rs100. In that case, the trader will not be able to buy the shares in the first place.
Here are the three most critical factors in bracket order.
- The primary order that books the trader’s position
- The target order or the profit booking order setting the upper price limit
- The stop-loss
How does bracket order work?
In bracket order, the original order can be of buying or selling. But the other two orders are opposite to the original order.
If the original order is to buy stocks, the other two will sell the stocks when the price reaches the limit. Only stop loss or target limit will be placed with the original order. But if the trader doesn’t put the original order, the others also get cancelled. It is because those are limit orders and not market orders.
The trader cancels the entire bracket order if the original order is not placed. And, as it is an intraday order, it will not get carried to the next day.
What are the benefits of a bracket order?
Now that we have learned ‘what is bracket order in the stock market?’, let’s look at its benefits.
- It allows traders to place three orders at one go. It is helpful for intraday traders who only have a limited trading window to square off at profitable positions.
- Traders can also use a trailing stop-loss which allows the stop-loss level to adjust in real-time depending on the price movement and direction.
- It allows traders to curtail risk on an intraday order. The trade either squares off in profit or at a limited loss.
Bracket order and cover order
Before comparing the two, let’s understand what cover order is.
Cover order is another order type that intraday traders use. It combines two orders, initial order and a stop-loss order. The target level restriction is missing in cover order.
The trader will place the original order and a mandatory stop loss in the cover order. The stop loss helps limit the downward losses to a great extent.
Besides the differences, bracket and cover orders are both intraday orders, meaning they get squared off at the end of the trading session. The cover order will get cancelled if the stop loss is not executed.
| Basis of comparison | Bracket order | Cover order |
| Definition | It is a three-legged order that includes an initial instruction and two limit orders | It consists of two orders – initial order and a compulsory stop loss |
| Significance | Plans profit or loss | It helps in mitigating loss |
| Squaring off | If the initial order is not placed, the entire bracket order gets cancelled | When the stop loss is not triggered, the trader can square off the position and lower capital loss |
Can you cancel a bracket order?
If you are placing a bracket order through Angel One, you can modify the stop loss values even after the execution of the first leg of the order. However, it is not possible to cancel a bracket order.
Conclusion
Understanding bracket order can be helpful to have in your kitty when you tread into the domain of intraday trading. However, one must only use it when they fully know intraday. Start intraday trading with Angel one. Open a demat account today.
