Trading in stock markets involves multiple order types to suit your trading style and risk management strategy. One such popular order type is the bracket order (BO), which lets traders automate their profit and loss limits from the same order. It implies that this trading strategy enhances your disciplined way of trading by setting predefined exit strategies for traders to have more control over trades.
In this blog, we will explore bracket orders, how they work, their advantages, and scenarios in which they are most beneficial.
Understanding Bracket Orders in the Stock Market
A bracket order definition is an intraday order consisting of three orders placed together, enabling you to control entry into the trade, profit target, and stop-loss simultaneously. It is mostly applied in day trading or high-frequency trading where immediate decision-making is essential. In addition, the main aim of this trading strategy is to cap losses and lock in gains from one transaction.
In issuing this order, a trader specifies:
- Entry Price: The price through which you want to buy or sell a security.
- Target Price: The profit target at which an order will automatically exit.
- Stop-Loss Price: The highest loss point at which an order will automatically close.
Mechanism of Bracket Orders
Before trading in this strategy, you need to know what is bracket order and its working mechanism. So, let us see how this trading strategy works in detail:
Step 1: Placing an Order
A trader places an order by specifying:
- Entry Price: The price through which an asset will be purchased or sold.
- Target Price: The price through which you want to make a profit.
- Stop-Loss Price: The price you would like to come out to lose as little as possible.
Step 2: Complete Automatic Execution
- When you place an order, target and stop-loss orders are activated if the entry price is hit.
- The trade closes automatically if the target price is reached. It closes to limit losses once the stop-loss price is hit.
- If either the target or stop-loss is executed, the other automatically cancels.
Step 3: Square-off at Market Close
Since bracket order in the stock market is primarily an intraday order, any open position is automatically squared off by the end of a trading session if neither the target nor the stop-loss is triggered.
Differences Between Bracket Orders and Limit Orders
The following table highlights key differences between bracket orders and limit orders:
| Feature | Bracket Order | Limit Order |
| Definition | A three-legged order includes entry, target, and stop-loss. | A single order that sets a buy and sell limit price. |
| Risk Management | Offers built-in risk management through stop-loss. | No built-in risk management. |
| Profit Booking | Once your target is achieved, the profit is booked automatically. | Requires manual monitoring to book profit. |
| Order Execution | Uses the One Cancels Other (OCO) feature. | Single order execution without OCO. |
| Trading Style | Suitable for intraday and high-frequency trading. | Suitable for any trading style. |
Key Benefits of Bracket Orders
Using bracket orders in trading has several distinct advantages, especially for traders focusing on short-term market movements. Below are some key benefits:
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Automatic Risk Management
The most significant benefit of this trading strategy is the built-in risk management through a stop-loss. Moreover, traders can define their maximum allowable loss, ensuring no unexpected losses occur.
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Profit Target Lock-in
This trading strategy automatically books profits when the asset reaches the desired price level. Hence, it reduces constant monitoring and gives you peace of mind.
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Minimised Emotional Trading
Bracket order in the stock market minimises emotional trading since it executes automatically according to parameters set in advance. In addition, it is particularly valuable for new traders who tend to make impulsive choices.
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Effective Execution
The One Cancels Other (OCO) functionality guarantees that when the trade is closed on either target or stop-loss, the other side of the order is cancelled to prevent any unintended open positions.
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High Leverage
Most brokers provide higher leverage for this trading strategy since the inherent stop-loss reduces the broker’s risk. Furthermore, this benefits traders who wish to utilise their capital to the fullest.
Ideal Scenarios for Using Bracket Orders in Trading
The bracket order trading strategy can be used to buy and sell stocks in different scenarios. Here are some scenarios where this type of trading strategy can be used:
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Intraday Trading
Day traders who buy and sell stocks within a single trading day use this strategy extensively to automatically lock in profits and cap losses.
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Volatile Markets
In volatile markets where prices fluctuate rapidly, this trading strategy helps secure profits without manual intervention.
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Limited Monitoring Time
Traders who cannot monitor the market continuously can benefit from this type of trading strategy to automate profit booking and manage risks.
Steps to Place a Bracket Order on a Trading Platform
Setting up a bracket order on most trading platforms is straightforward. Here is a step-by-step guide:
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Step 1: Log in to the Trading Platform
Open your preferred trading platform and log into your account. Complete the registration and KYC process by submitting all the required documents. Add funds to your account to start trading.
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Step 2: Select the Stock/Asset
Explore the dashboard to create a watchlist of all the stocks you wish to trade and choose the option to place a bracket order.
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Step 3: Set Entry, Target, and Stop-Loss
Set all three prices at which you intend to enter the trade, book a profit, and exit in case of a loss.
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Step 4: Confirm and Place the Order
Review the order details and place the order. Your trade is now active, and either the target or stop-loss will automatically trigger.
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Step 5: Monitor or Close Manually
If needed, you can manually close the trade or modify the parameters before the market closes.
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Step 6: Use Resources and Tools
You can use the trading platform’s app to customise your trading strategy. The app will provide analytical tools, charts, and research reports, which can be referred to.
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Step 7: Customer Support
Reach out to customer support immediately if you encounter any issues while trading.
Final Thoughts
A bracket order is a useful trading strategy for intraday traders who want to optimise gains and minimise losses. Its integrated stop-loss and profit target capabilities allow traders to be disciplined without being swayed by market movement. Moreover, it reduces manual intervention, such that trading decisions are made logically and not based on the trader’s emotions. Nonetheless, knowing the market dynamics is essential, as well as implementing realistic stop-loss and profit target levels.
