Understanding Bracketed sell Order, its Working, Advantages and Drawbacks

Summary:

A bracketed sell order entails setting three key parameters — sell limit order, sell stop order and regular sell order — to automate a stock’s selling process. It weeds out emotional trading decisions and helps in efficient risk management.

The primary aim for any stock market investor is to lock in profits and limit losses. There are several ways to do it; one such mechanism is a bracketed sell order. So, what does it mean and you can use it to your advantage? Let’s find out.

What is a bracketed sell order?

A bracketed sell order is a kind of stock trading order that involves setting three key parameters that help you automate a stock’s selling process and manage potential profits and losses. The three parameters are:

• Sell limit order

The sell limit order is the upper limit or profit-taking stage of the order. In other words, it’s the maximum price at which you are willing to sell stock to ensure profits. If a stock’s market price reaches or exceeds this limit, the sell order gets automatically executed at the specified price

• Sell stop order

A sell stop order acts as a safety net to limit potential losses. You set a lower limit for a stock, known as the stop price. A market sell order is triggered if a stock’s market price drops to this price or below it. This limits your potential losses in case the price drops down further.

• Regular sell order

If a stock’s price neither reaches the sell limit nor sell stop order, you can sell a stock at its current price if you feel so.

Working of a bracketed sell order

Here’s how a bracketed sell order works. Suppose you have 100 shares of a company, XYZ Ltd., currently trading at INR 200 per share. You set a sell limit order of INR 250 and a sell stop order of INR 180. You put a bracketed sell order in place, and if the stock’s price reaches INR 250, your 100 shares are automatically sold at this price, locking in a profit of INR 50 per share. Your total profit stands at INR 5,000 (100 X 50).

On the other hand, if the price drops to INR 180, the stop sell order gets triggered, thus limiting your losses to some extent. Your total loss is limited to INR 2,000 (100 X 20). However, if the stock’s price neither reaches INR 250 nor INR 180, you can sell it at the market price you deem fit.

Advantages of bracketed sell order

Here are the advantages that a bracketed sell order brings to the table:

• Helps in risk management

This is one of the primary benefits of a bracketed sell order. By setting a predefined sell stop order, you limit potential losses. On the other hand, the sell limit order ensures that you secure profits when a stock’s price reaches a specified target price. This structured approach helps you to mitigate risks associated with stock market fluctuations.

• Eliminates emotional responses

More often than not, emotional decision-making has disastrous consequences in stock market investments. A bracketed sell order helps eliminate it by automating the selling process based on predetermined conditions. You are less likely to undertake decisions driven by greed or fear. This leads to a disciplined trading approach.

• Fosters time efficiency

If you don’t have the luxury of time to monitor markets constantly, a bracketed sell order is a time-efficient solution. The automatic selling process means you don’t need to engage in real-time trading actively. Thus, it allows you to easily meet other commitments without worrying about constant market monitoring.

• Capitalising on favourable market conditions

A sell bracket order allows you to capitalise on favourable market conditions that propel a stock’s price to the target price at which you want to book profits. It frees you from holding onto one stock for a long time, hoping to make further gains. Automatic execution ensures prompt implementation of your trading strategy without delays.

• Offers customisation and flexibility

With a bracketed sell order, you can customise the parameters as per your choice as per your goal and market analysis. It allows a tailored approach to each trade you undertake, factoring in a stock’s unique characteristics. The ability to sell at specific price points adds a layer of sophistication to your trading strategy.

Drawbacks of a bracketed sell order

There are certain drawbacks of a bracketed sell order. Some of them are:

• May get triggered based on short-term price fluctuations

Stock markets are volatile, with short-term price fluctuations. A bracketed sell order may get triggered based on short-term price movements, potentially leading to undesired outcomes.

• Inability to adapt to market conditions

If any event happens after the order gets executed, the preset limits may no longer align with your revised outlook for a stock. The lack of adaptability could lead to suboptimal outcomes.

• Over-reliance on automation

While automation has its advantages, it also poses certain risks. Over-reliance on automated bracket sell orders can lead you to neglect ongoing market analysis and failure to pivot them based on changing conditions.

Wrapping it up

When implemented with prudence, a bracketed sell order brings a structured approach to trading, allowing you to set profit targets and mitigate potential losses. That said, it’s crucial for you to implement them after carefully analysing present market conditions and reassessing them based on evolving circumstances.