What is Bracket Order?
A bracket order is an intraday order that combines a buy order, stop-loss order, and a target order. In other words, along with an initial order (buy or sell), there will be two opposite side orders placed.
Bracket order = initial order (buy or sell) + stop-loss order (sell or buy) + target order (sell or buy).
For instance, if the initial order is a sell order, then both the target and stop-loss orders will be buy orders. Similarly, if the initial order is a buy order, the remaining two will be sell orders.
Stock market traders can benefit from squaring off a favourable position at the end of the trading session from a bracket order. Intraday traders can reduce their risk through bracket order trading. With the target order in place, traders will be able to book a profitable position, or with the stop-loss order in place, they will be able to limit losses to some level.
How Do Bracket Orders Work?
A bracket order is designed to complete or bracket your order. There are typically three orders in a bracket order: the initial order, stop-loss order, and target order. The initial order can be a buy or sell, but the other two orders are opposite orders.
So, if the first order is a buy order, the other two are sell orders. And along with the initial order, only one of the other two orders will be placed. Moreover, if the initial order is not placed, the other two orders naturally won’t be placed. This is because all the orders are limit orders and not market orders.
Let’s understand this with the help of an example. Let’s say you placed an initial buy order at a price of INR 50 per share. Along with this, you placed a target order at INR 55 and stop-loss at INR 48. The initial order will be executed only when the market price reaches INR 50.
Once the order is executed, by the end of the day, if the share price increases and touches INR 55, your sell order will be placed, and the broker cancels the stop-loss order.
However, if the market falls and the share price goes down, the stop-loss order will be placed when the share price reaches INR 48, and the broker cancels the target order.
If the initial order isn’t executed, the broker cancels the complete bracket order as it is an intraday order and will not be carried over to the next day.
Advantages of a Bracket Order
- By essentially placing three trades at once. You can limit your risk exposure and loss by placing a stop loss order. This way as and when the trade reaches the loss limit your stop loss order is executed and the profit-making order is cancelled.
- Additionally, the trailing stop loss places a greater advantage through the automatic adjustment of stop loss orders. The trailing stop loss feature tracks the trailing market price for such an adjustment.
- Furthermore, it gives you the opportunity to book profits with a predetermined profit objective price order.
- In this era of digital technology from placing a bracket order to executing it, everything is seamless and automatic. There is no scope or need for a manual effort here. As soon as the profits levels are realised, the orders get closed automatically. You do not have to execute a separate instruction for the same. Moreover, the entire process is hassle-free, simple, and effortless. This makes it more attractive and efficient for traders.
Disadvantages of a Bracket Order
- At the end of the trading day, it is essential to square off the position. A trader cannot leave the trade incomplete or open.
- A major disadvantage is that a bracket order cannot be cancelled. This means that once you have entered a bracket order you have to necessarily execute it. Furthermore, to execute it you have to close the trade position at the end of the trading day.
- It is an intraday trading order. However, it is not applicable in the case of stock options, commodity options, and currency options.
List of Stock Brokers Providing Bracket Orders in India
- HDFC Securities
- Kotak Securities
- Motilal Oswal
- IIFL Securities
- Alice Blue
Frequently Asked Questions
In a bracket order a spread is the difference between stop loss order trigger price and market price. This spread is maintained by an investor through the bracket order.
The validity or duration of a bracket order is 1 day. This is mainly because the bracket order has to be closed at the end of the trading day.
Yes, an investor can use the bracket order for both cash and future trades.
After a buy order is placed the book profit order is not changed. However, if the market price
goes down then the stop loss trigger price remains unchanged. Furthermore, if the market price rises then the stop loss trigger price will rise. Before increasing the stop loss trigger price, the spread will be maintained. The spread is the difference between the stop loss trigger price and the market price.
If the market price reaches the stop loss trigger then the trade position will be squared off at the market price. Simultaneously the book profit order will stand cancelled automatically.
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