Bracket order and cover order are two types of orders that are mostly placed during intraday trading. These orders are coupled with a stop-loss order and/or a target order, as the case may be. Mentioned ahead, is more information on what is bracket order and cover order.
A bracket order is an order where three types of orders are coupled together.
Bracket order= initial order + stop-loss order + target order.
They are designed to help traders place three orders in one click. As the name suggests, these orders help to ‘bracket’ an order by deciding the stop-loss levels of trade and also the target exits for the same trade. It is an advanced intraday trading order. A trader enters into a new position with an exit and a stop-loss order.
Cover order is an order where a compulsory stop-loss order accompanies the initial order. In a cover order, a trader places a buy/sell order which can be a limit or market order. The compulsory stop-loss order is in a specified range and cannot be cancelled.
Placing a stop-loss order, like mentioned before, helps mitigate risks. All cover orders get automatically squared off during the same trading session and are not carried over the next day.
A difference between bracket order and cover order is that target order is not available in cover order.
It is a useful tool for intraday traders.
Cover order= Initial order + stop-loss order
How is a bracket order executed?
A bracket order is executed according to this formula: Bracket order= initial order + stop-loss order + target order.
A trader places the main order, which is the initial order. This is where the trader enters into a ‘new position’ by placing a buy or a sell order for a particular trading session. As soon as the initial order is executed by the system, in bracket order, the system will automatically place the other two orders as well.
Stop-loss Order: A stop-loss order is an order placed when a trader wants to sell or buy a stock once it reaches a specific price. For example, in a stop-loss order, the trader may specify a lower limit price beyond which he or she does not want to hold the stock anymore. The system automatically places a sell order once the stock reaches that price. Similarly, if you sold a stock at Rs 100, you can place a stop-loss order at Rs 105. So when the market price reaches Rs 105, a buy market order will be sent to the exchange.
Target Order: A target order is more like the other end of the bracket. With a target order, a trader books a target profit price beyond which the system has to buy or sell the stock once it reaches that price. This is a difference between bracket order and cover order as this option is not available in cover order.
As we can understand from the above-mentioned three types of orders, stop-loss and target orders are mutually-exclusive. They cannot take place together and so logically if one order gets executed, the other gets cancelled automatically.
Let’s understand this with the help of an example:
We are taking an example of a trader who entered the market with a buy order.
Say there is a trader X who places an order for 10 shares and the live market price at that time is Rs 120.
X places a stop-loss order of Rs 100 and a target order of Rs 150. If the stock price falls to Rs 100 per share, the stop-loss order will get executed and the target order will automatically get cancelled. The opposite will happen in case the stock price rises to Rs 150 per share.
There is a third scenario. If the trader has placed a limit order at Rs 120 and the stock price does not reach Rs 120, then all three orders will get cancelled. Hence the initial order’s execution, the order with which the trader enters the market is crucial. If that does not get executed, both the stop loss and target order will be cancelled for the day. However, this is the case only with limit orders. In a market order, the first order will get executed at the live market price only.
A bracket order helps traders to limit losses and mitigate risks. It also helps traders to automate their trades to a great extent. All bracket order positions are squared off by the end of the trading day therefore they are valid for intraday trading mostly.
In case these orders remain pending, the order will get automatically squared off by the system.
Let’s understand cover order with the help of a market order example.
X wants to buy 10 shares of a company which is currently trading at Rs 100. In a cover order X can simultaneously place a stop-loss order too. Say X places a stop-loss order at Rs 95 beyond which X will want to sell the stock.
After the initial order gets executed, the sale order will be placed automatically once the stock price reaches the desired level.
In case the stop-loss order is not executed, the entire order will get automatically squared off by the system before the cut-off time.
To Sum Up
To sum what is bracket order and cover order, they are orders which you club a stop-loss and or a target order as the case may be. Intraday traders mostly use these. Understanding these order types require traders to be equipped with a higher level of knowledge and research on stocks. At times, bracket order and cover order traders mitigate risks.
| Particulars | Bracket Order | Cover Order |
| Meaning | This is a 3-in-1 order as two orders are clubbed with the initial position. | This is a 2-legged order as with the initial order, there is an option of a stop-loss order only. |
| Formula | Cover order= Initial order + stop-loss order+target order | Cover order= Initial order + stop-loss order |
| Squaring off the order | In bracket order, the order will get automatically squared off by the system only when both the stop loss and target order were unsuccessful. | In a cover order, it depends only on the stop-loss order. |