What is bracket order with example?

Bracket orders are designed to help limit your loss and lock in a profit by "bracketing" an order with two opposite-side orders. A BUY order is bracketed by a high-side sell limit order and a low-side sell stop order. A SELL order is bracketed by a high-side buy stop order and a low side buy limit order.

The order quantity for the high and low side bracket orders matches the original order quantity. By default, the bracket order is offset from the current price by 1.0. This offset amount can be changed on the order line for a specific order, or modified at the default level for an instrument, contract or strategy using the Order Presets feature in Global Configuration.

Bracket order is a type of market order that is placed during intraday trading only. Such orders combine a buy order with a stop-loss and target order. Bracket orders are meant to help stock market traders square off a favourable position by the end of the trading session. However, the result of this is entirely dependent on the selection of stock, how the trader picks the stop-loss and target levels.

What is a bracket order?

Bracket order combines three orders in one. Like the name suggests, bracket orders are designed to “bracket” your order. This means that along with the initial order, there will be two opposite side orders placed as well. This can work for both buy and sell orders.

In case the initial order is a buy order, then both the target and stop-loss orders will be sell orders. Similarly, when the initial order is a sell order, the other two orders will be a buy order.

Let’s consider a bracket order example to understand this:

Say an investor places a limit order to buy a stock of a company at Rs 100 per share. This is placed along with a stop-loss at Rs 92 per share and a target order at Rs 105 per share.

Here we can see that the investor’s main position of Rs 100 is bracketed by a higher-priced and lower-priced limit order.

Only one of the two limit orders can be placed.

Scenario 1: After the investor places a limit order for Rs 100 if the stock price rises and goes to Rs 105, then the target order will get automatically placed, and naturally, the stop-loss order will get cancelled.

Scenario 2: In case the stock price falls to the investor’s stop-loss limit, then the target order will get cancelled as the order will get executed at Rs 95 per share.

Scenario 3: Since bracket order in the share market is mostly a limit order, there is a chance that the main order also does not get placed. In this example, the main order was a limit buy order of Rs 100. If the stock price does not reach Rs 100, then the investor will not be able to buy the stock in the first place.

Nevertheless, in any of the three scenarios, if an order does not get placed, the bracket order will be cancelled by the broker at the end of the trading day. This is because bracket orders cannot be carried over to the next trading session.

To summarise, bracket order in the share market is made up of three orders.

• The main order that books the trader’s position
• A target order. Some call this a profit booking order.
• A stop-loss order

Benefits of a bracket order

The first benefit of bracket order is that it enables traders to place three orders in one go. It is useful for intraday traders who have to square off a profitable position in around 6 hours or so.

Some brokers also provide the trailing stop-loss feature which allows the stop-loss level to get adjusted on a real-time basis depending on how the current market price is moving and in which direction.

Bracket order may help intraday traders to curtail some risks because of the way bracket orders work. It will either help traders to book a profitable position with the target order in place or help to curtail losses to some extent with the stop-loss order in place.

Bracket order and cover order

Cover order is also another type of order that intraday traders can use. There is a significant difference between bracket order and cover order. While bracket order is a combination of three orders, cover orders are a combination of two orders.

Cover order combines an initial order and a stop-loss order. It does not have a profit booking/target order.

Cover order= initial order + stop-loss order

Along with the initial order, a trader can place only a compulsory stop-loss order. Here too, the stop-loss order can help the trader control risks to a great extent.

There are a few similarities between the two types of orders.

Both get squared off in the same trading session. In the case of cover order, if the stop-loss order is not executed, the order will be cancelled by the end of the trading session. Cover orders, like bracket orders, cannot be carried over to the next trading session.

What is meant by intraday trading?

Here is a quick recap of what is meant by intraday trading. Intraday trading happens when the trader mostly buys and sells the scrip in one trading session. The trader will buy the stock very close to the market opening time and sell it near the closing time. Traders try to book profit within one trading session.

To Sum Up

One must attempt such order types only when they have full knowledge about how the stock market works and the nitty-gritty of intraday trading. To understand and analyse stocks for intraday trading, there are many technical indicators like momentum oscillators and candlestick charts that one must be aware of. Squaring off a profitable session within the same trading day can turn out to be challenging if stock market participants are not briefed with the characteristics of intraday trading. Study, research and be an informed investor!

Bracket orders are an evolved version of cover orders.