Bracket order in stock market

The biggest advantage of a bracket order is that it helps traders in managing time by combining multiple orders in one transaction. Using this tool, day traders can easily take positions in multiple stocks without having to monitor the minute-by-minute movement of individual stocks.

Stock markets can be daunting, especially for day traders. It can be overwhelming to take quick decisions in a complex financial world where the dynamics change in a brink of a second. In such a fast-paced environment, risk-management tools like bracket orders can be a blessing for day traders.

Bracket order is a trading technique where in your main order is placed along with two more orders – a stop-loss order and a target order. This means that you are taking a single trading position with three interconnected orders.

So, with just one click, you are building a complete trading strategy by deciding the levels where you would want to book profits, as well as by placing a risk limit through a stop-loss order in case the stock movement turns unfavourable. As this creates a bracket around your main trade, it is called a bracket order.

For instance, suppose you want to trade in the shares of a company ABC through a bracket order. As soon as you choose the option of ‘bracket order’ on your trading portal, the first order created would be the main order. It can be both a 'buy' or a 'sell' order (in case of short-selling).

Let’s understand this through an example. 

For instance, you placed a ‘buy’ order for 500 shares of ABC at ₹100 apiece. Now, as soon as you placed this order, two more orders would get created simultaneously, for which you would have to set price details. So, say you set the stop-loss order at ₹95 per share and a target order at ₹110 per share.

Now, in case the stock breaches the ₹95 levels during the day, your stop-loss order would get triggered and your shares would be automatically sold, thereby limiting your losses to a predetermined level. But, in case the share price rises to hit ₹110 levels, the target order would get executed and profit would be booked.

In case, the stock neither hits the stop-loss level nor the target, the position would get squared off automatically at the end of the trading session. Hence, in such a scenario, all 500 ABC shares would be sold at the market price at the end of the session that day.

Hence, a bracket order is essentially automating the entire trading process for an intra-day trader. Just choose a stock, take a trading position and feed the prices in the system, and you are done.

Things to know about bracket order

It is important to know that the target order and stop-loss order become active in a bracket order only after the main order is executed. So, in case you had placed a main order which was a ‘limit’ order and not placed at the market price. If that order was not executed during the trading session, the other two orders would automatically get cancelled. Only the execution of the main order triggers the other two orders.

Also, a bracket order is valid only for a single trading session and the positions can’t be rolled over to subsequent days.

Advantages of bracket order

The biggest advantage of a bracket order is that it helps traders in managing time by combining multiple orders in one transaction. Using this tool, day traders can easily take positions in multiple stocks without having to monitor the minute-by-minute movement of individual stocks.

Also, bracket orders help traders stay disciplined about their trading strategy and not get impulsive during unpredictable and volatile market movements.

Bracket orders put traders in control of their risk-reward ratio. Securing timely gains and limiting losses protect traders’ capital, thereby ensuring a successful trading journey for a longer duration of time.

To sum up

Smart traders can easily automate the trading process for themselves with the help of bracket orders. This one single trading technique holds the vast potential of not just securing gains for them, but also protecting them from the risk of capital erosion.