A bracket order
enables you to place simultaneous stop and limit orders in the market. The stop order acts as a protective stop-loss if the security’s price falls, while the limit order is your desired profit target.
let's say you purchased 100 shares of XYZ stock valued at $20 per share. If the stock price dropped to $18, you want to exit the position to minimize your losses. Conversely, if the stock moved to $22, you want to exit at a profit.
To achieve your desired exit strategy, attach a bracket order to your existing position to cover both the profit and loss scenarios. This type of order is referred to as one-cancels-other (OCO)
. An order will only trigger when a profit target is met or if your desired stop loss is reached. If either the stop or limit order is triggered, the remaining order is cancelled automatically, without you having to actively monitor the stock’s price movements.
Advantages of bracket orders
- Automate the management of your trades, reducing the need to monitor each position manually.
- Define your risk level when the bracket order is entered. Since you're setting your maximum stop-loss price at the time of the order, you won't allow emotion to affect your trading decisions.
- When the markets are fast moving, you can hit your defined profit targets very quickly (i.e. seconds) on small price changes.
Disadvantages of bracket orders
- On partial fills of either the limit order or stop loss, the reverse order will be automatically cancelled, meaning you will have no downside protection at times.