What is bracket order & trailing stop loss in connection with stock market?
The world moves too fast and is often too difficult to keep track of. Markets move even faster and in all this turmoil, bracket orders come as a great boon in managing your risks. As the name goes, Bracket orders “bracket” your “orders”. It is an intraday order which can not be converted into delivery. However stupidly simple that may sound, that’s what it actually is.
Benefits of Bracket Order
- Bracket orders make sure that your profit or loss lie between two limits of an acceptable profit and bearable loss that you set.
- Because the maximum loss is limited,the margin requirements are really low (between 2% and 2.5%) compared to the 10-11% margin requirement in other risk based trades.
Say I were to buy 200 stocks of a company at Rs 100 each and I feel that it will probably cross Rs 104 and even if it goes till 99, I am ready to take that loss for the chance of a gain. This is when a bracket order comes in handy where I can programme my online trading software to buy at Rs 100, sell as soon as the stock hits Rs 104 or goes down to Rs 99.
This is done by placing three orders simultaneously.
- The first is the limit order for the buying or selling exercise that you are looking for.
- The second order is a profit booking order that you set as the profit that meets your expectations.
- The third order is a stop loss order. A stop loss order helps you exit a position as soon as the stock hits that bottom of loss. This order is a reflection of the loss that you are willing to take with the stock in concern.
All these orders are placed simultaneously and are mutually exclusive but as soon as any one of the profit limit or stop loss is hit, the other is cancelled. It is also important to note that a bracket order is an intraday order and needs to be squared off at the closing of the day at or after 3:15 pm (1515 hrs IST).
Also Read: Stop Loss Orders Made Easy
Trailing hurt your Stoploss: Security that does not profits
Along with these features, there is a cherry on top called a trailing stop loss. A trailing stop loss is the dynamically adjusted version of a normal stop loss. It changes the value of a stop loss in your favour when the market is moving in a direction that can earn you profits. It helps you reduce the potential loss that you might incur during online trading. This is an optional feature that you may or may not keep. You can still choose for a normal static stop-loss like you do while placing a cover order.
Bracket orders are, in very simple words, a way to take your emotions away from your actions and make a more calculated decision about your trade.
Please note as per the exchange regulation of peak margin reporting, peak margin penalty is charged if there is margin shortfall. Hence, CO/BO are disabled for NSE FNO, CDS and MCX. You can place a bracket order for NSE cash for intraday only.
A Detailed Example
Now say NIFTY is right now at 8580 and by my study of the charts, I am sure it will move to 8630 (up by 50 points). On NIFTY, one tick, or the smallest value by which the exchange must move to reflect a change, is 0.05. Hence 50 points is 1000 ticks.
So I place a bracket order to buy a lot of NIFTY at 8580 (limit order). I know that the maximum loss that I am ready to bear given the possibility of profit is 25 points. Which means that I need a stop loss at 25 points (8555).
On initiating a bracket order I will have to enter a limit order value for buying the lot (at 8580 in our case). The next step is to place a profit ceiling. As mentioned before, I think that there is a fair possibility that the index will move up to 8630, hence that is where I will place my sell order as a target. So I can enter 50 points, or 1000 ticks as my target in the software. (you can chose to enter values in ticks or absolute points by clicking the appropriate box)
The last step is placing a stop loss order. Now here in a bracket order, you have two choices. One is a normal stop loss order where your lot will be sold automatically once the exchange hits a bottom line that you set (Say 8555 in our case). So I place my stop loss at 25 points or 500 ticks.
However, there is a small catch. In a scenario where the index goes upto say 8625 and then falls back all the way to 8540, I will book a loss even after having had the possibility of making money.
A more elegant option however, that is made available in a bracket order, is to have a trailing stoploss.
Say I choose a trailing stoploss of 25 points or 500 ticks and set trailing ticks (absolute) at 1 point. So every time the index moves up (in my favour) by one point, my stop loss value will move up by one points. That way if the index goes from 8580 to 8583, the stoploss will now be at 8558.
Hence in the event where the index goes up to 8620 and then comes back down, my stop loss will rise to 8595 and I will still make money against the initial limit order of 8580.
That is how a bracket order works in online trading software, the moment one order among the Stop-loss or the target order is executed, the other is automatically cancelled.
Placing an Order
Buy Bracket Order Entry: Shift+F3
Sell Bracket Order Entry: Shift + F4
Or right click on the scrip to choose Bracket Order Entry
Also Read: Now Pledge your shares for extra margin
Modifying or Exiting a Bracket Order
Whenever you wish to move out of a bracket order, simply click on the target or the stop loss in the order book and click exit or you can simply change the target or SL value to the market price.
Margin in Bracket Orders
Bracket Order positions carry lower margin requirements because of the mandatory stop-loss placed in the beginning of the order.
We provide you 5X exposure for bracket orders. So, for buying 25 NIFTY at 8429 you would only need a margin requirement of around Rs 4214 (10% of 8429*25, and 2% of that given the 5X exposure). This comes down to an effective margin requirement of around 2%. Something pretty amazing for the sheer volume that you get to trade with.
To read more about the margin requirements in various segments, visit our knowledge base
We hope this article has helped you better you understanding about bracket orders, their uses and their effectiveness in a volatile market situation.
If you still have any questions or would want us to explain other similar online trading concepts through our blogs, please feel free to comment down below and we’ll make sure we address your concerns.
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