What is a Bracket Order? Meaning and Benefits

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  • 26 Oct 2023
What is a Bracket Order?

In intraday trading, seasoned investors often employ various strategies to maximize profits and minimize losses. One such strategy gaining popularity is the use of bracket orders. Read on to learn what bracket order is in share market and its advantages.

A bracket order is a sophisticated trading technique through which you can place multiple orders simultaneously around a specific stock position. Comprising three key components, a bracket order includes the entry, target, and stop-loss orders. Each of them has a distinct purpose in managing the trade effectively.

Entry Order: Initiating the Trade

The entry order is the first part of a bracket order and represents the initial trade you want to execute. It specifies the price at which you wish to enter the market, either to buy or sell a particular stock. This order serves as the starting point for the entire bracket order strategy.

Target Order: Locking in Profits

The target order is the second component and is designed to capitalize on positive market movements. It sets a specific price at which you aim to sell the stock to secure profits. By automating the profit-taking process, the target order eliminates the need for constant monitoring and emotional decision-making, allowing traders to adhere to their predefined strategies.

Stop-Loss Order: Limiting Losses

The stop-loss order, the third and equally crucial element, is implemented to mitigate potential losses. This order sets a predetermined price at which your position will be automatically sold to cut losses. The stop-loss order is a crucial risk management tool, providing a safety net against unexpected market downturns.

Let's suppose you want to buy 100 shares of XYZ company at INR 50 per share. You can then set a bracket order with the following parameters:

  • Entry Order: Buy 100 shares at INR 50 per share
  • Target Order: Sell 100 shares at INR 55 per share
  • Stop-Loss Order: Sell 100 shares at INR 48 per share

In this scenario, you aim to capitalize on positive price movements by selling at INR 55 and limiting potential losses by automatically selling if the price drops to INR 48.

Now that you know bracket order meaning, let’s look at its benefits. Some of its major benefits are:

  • Automation and Efficiency: Bracket orders automate the trading process, enabling you to execute complex strategies without constant monitoring.

  • Risk Management: By setting predefined entry, target, and stop-loss points, bracket orders help you manage and limit your risks effectively.

  • Emotional Discipline: Removing the need for emotional decision-making, bracket orders allow you to stick to your strategies despite market volatility.

Summing it Up

A bracket order is a powerful tool that empowers you to execute precise and disciplined strategies in the stock market. Combining entry, target, and stop-loss orders allows you to automate their trades, manage risks, and enhance your overall trading experience. As with any trading strategy, it is essential for you to thoroughly understand the mechanics of bracket orders and carefully tailor them to your specific financial goals and risk tolerance.

FAQs on Bracket Order

A significant drawback exists in the inability to cancel a bracket order. This implies that once you initiate a bracket order, you must execute it without the option to cancel. Moreover, executing it requires closing the trade position by the end of the trading day, as it is an intraday trading order.

Yes, some brokerage houses offer the facility to modify your bracket order. You can modify the entry order, target order and stop-loss order.

Regular trading does not permit the use of bracket orders. Traders employ bracket orders to automatically square off positions at a favorable price level by the conclusion of a trading session.

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