Stock Market

Bracket Order and Cover Order – Stock Market Order Types: Part-3

Bracket Order and Cover Order to manage profit, loss and risk

This is the third and the final post in the series of stock market order types. Here, I have discussed in detail the two most important order types for Intraday Trading: Bracket Order (BO) and Cover Order (CO). Apart from that, I have also included three more order types: All-Or-None (AON), Disclosed Quantity (DQ) and Minimum Fill (MF).

 

I sometimes wonder how tough it would have been for me to do day trading if there was no Cover Order and Bracket Order. Without them, I needed to place multiple orders and manage each of them separately as long as I was in the trade. These two order types have made it really simple for any day trader to manage profit & loss and to place multiple orders just by filling up numbers in a single order window.

 

So, continue to read to know why and how you can place BO and CO to reduce your losses and maximize your profits. 

 


BO (Bracket Order)


The Bracket Order ( BO ) is one of the most sophisticated order type used by intraday traders. In fact, the Bracket Order type is strictly for intraday trading only.

To simplify our understanding, we will take stock of “RELIANCE” whose shares are trading at Rs.1281.65/- on the day I took the snapshot of this bracket order in Kite of Zerodha. (as you can see in the red rectangular box)

 

Stock Market Orders - Bracket Order
Bracket Order

 

Three salient features of a Bracket Order:

 

  • The order for entering the trade has to be a limit order.

 

If you want to go long on a stock, then you can place a buy bracket order. This buy order for entering the trade is actually a buy limit order. If you have already read the blog post: Stop-Loss, Market and Limit Order – Stock Market Order Types: Part-1, then you know that the buy limit price should be lower than the current market price of the stock.

So, if you don’t want to pay more than Rs.1277.65 per share, then you will place the bracket order with buy limit price at Rs.1277.65/- (as you can see in the ‘PRICE’ field in the snapshot).

This buy limit order is the first part of a bracket order. There are two more orders that are mandatory to complete a BO which we will cover in the next two points.

 

  • You have to specify a mandatory stop-loss for exiting the trade, in the form of a stop market order.

 

This stop loss order prevents you from suffering unmanageable losses. If you try to place a bracket order without giving the stop-loss value, then the order will be rejected by your broker. This stop-loss order is actually a sell stop market order (since you are going long on RELIANCE stock).

So, for RELIANCE shares, the trigger price will be below the buy limit price of Rs.1277.65/-. Suppose, you decide not to suffer a loss of more than Rs.3/- per share. So, you will place your stop-loss at Rs.(1277.65 – 3) = Rs.1274.65/-.

Depending on your broker, you may either have to mention the absolute value of the stop-loss (Rs1274.65/-) or the relative value of the stop-loss (Rs.3/-). In Zerodha’s Web-based Trading App. – Kite, we use the relative value. As you can see in the snapshot, the ‘STOPLOSS’ field is populated with the value ‘3’.

 

  • You have to specify a mandatory target for exiting the trade, in the form of a limit order.

 

As you have gone long on the trade, this limit order will be a sell limit order. It is this limit order which takes the greed out of trading. This limit order actually caps your profit by automatically exiting the trade when the price of RELIANCE shares reaches your predicted target.

Let us continue with our example. Remember that you have purchased RELIANCE shares at a limit price of Rs.1277.65/-. After technical analysis, you have found that the price can rise till Rs.1286.65. So, you decide to place your target (sell limit order) at Rs.(1277.65 + 9) = Rs.1286.65/- .

Just as we mentioned our relative stop-loss value at Rs.3/-, similarly we will mention the relative ‘TARGET’ at Rs.9/- (as you can see in the snapshot).

The relative values of the ‘STOPLOSS’ and ‘TARGET’ are with respect to the limit price (Rs.1277.65/-) of the bracket order and not the current market price (Rs.1281.65/-).

 

Advantages of Bracket Order:

  • It takes the emotions out of trading and hence limits your losses.
  • You can use higher leverage while trading through a margin account.

 

Disadvantages of Bracket Order:

  • It caps the profit.
  • It can only be used for intraday trading.

 


CO (Cover Order)


The only order that has a chance of winning the popularity competition against the bracket order is the cover order.

Why?

It is almost similar to a bracket order, except for the fact that it doesn’t cap your profits!

Then why doesn’t the cover order always win the competition against the bracket order?

Because it doesn’t take the emotion completely out of trading.

The trend may reverse multiple times in Intraday Trading. As you have no target set in a cover order, it may happen that the price reaches a certain high and then comes down all the way down to hit your trigger price of stop-loss order!

There is one more disadvantage of the cover order. The order for entering the trade has to be a market order (and not limit order). So you cannot enter the trade at the price of your choice.

 

Stock Market Orders - Cover Order
Cover Order

 

Let’s take up an example to understand how the order works. I took the above snapshot of this cover order in Kite of Zerodha. RELIANCE  was trading at Rs.1402.50/- at that time. As you can see, it is a buy Cover Order for 20 shares.

You can also see there is no field for ‘TARGET’ which makes this order type vulnerable to the trader’s greed. The trader has to exit the CO manually. So, the trader will be tempted to hold on to the trade as long as possible and some of the time he/she won’t be able to get out of the trade in time causing either reduced profit or loss. The field ‘PRICE’ is non-editable which means you can’t set limit price. You have to enter the trade at market price.

But the field ‘TRIGGER PRICE’ is editable. It is actually the stop-loss trigger price. Here, I have entered the value of Rs.1398.50/-. That means if the price falls to Rs. 1398.50/- your stop-loss order will be triggered and the shares will be sold at market price.

 


AON (All-Or-None Order)


If a trader places the All-Or-None order then, the full order must be matched and executed. If the full order is not matched, the order stays in the order book (Special Terms Book) of the stock exchange till it is matched. The AON order stays in the order book until the trading session ends or until the trader cancels it before the end of the trading session.

 

Currently, the AON order is not available in India as per SEBI directives.

 


DQ (Disclosed Quantity)


Disclosed Quantity Orders are normally used by traders when the order quantity is huge and the trader wants to disclose only a fraction of the order to the market at a time. Once that part is executed, he then discloses the next fraction of the order to the market. This continues until the whole order is executed.

Disclosed Quantity orders are used in conjunction with primary order types (like market order).

Suppose, you want to buy 1000 shares of XYZ stock. So if you place a buy market order with disclosed quantity as 250 then at first only 250 shares will be displayed and bought from the market. When the first 250 shares are purchased then the buy order for the next 250 shares is released into the market. When these 250 shares are purchased then the buy order for the next 250 shares is released. This goes on until all 1000 shares are purchased.

 


MF (Minimum Fill)


The Minimum Fill order is almost similar to a DQ order. But there is a slight difference.

In MF order type the trader has to specify the minimum quantity by which the order should be filled. Let us understand this with a very simple example.

Suppose, you want to buy 1000 shares of XYZ stock. So, you place a minimum fill order with the minimum fill as 250. When your order will be executed in the market, at-least 250 shares must be purchased per trade. That means your entire order must be filled in 4 trades (1000/250) at maximum. Your entire order may get executed in a single trade also if 1000 shares are tradable in the market at once.

 

Currently, the Minimum Fill order type is not available in the system as per SEBI directives.

 


So, I hope this post will help you get a head-start in intraday trading. If you like this post and feel that it can help someone you know, then please do share it with them.

If you have any doubts regarding any of the order types, you can post your queries in the comment section.

Leave a Reply

Your email address will not be published. Required fields are marked *