A bracket order is a risk control technique employed to place orders with predetermined exit points. Traders can employ it to “bracket” their position with two opposite-side orders: one take-profit order to secure profits and one stop-loss order to limit potential losses. It ensures trades close automatically on the basis of price action, reducing emotional trading.
How Bracket Orders Work
When placing a bracket order, a trader executes a parent order to buy or sell a security. Two additional orders are initiated at the same time with this:
- Take-Profit Order (Sell Limit Order) – Gets activated at a higher price level (in a buy order) or lower price level (for selling). Whenever the price reaches this level, the order executes to lock in profits.
- Stop-Loss Order (Sell Stop Order) – Triggered at a lower price (for buying) or higher price (for selling). In case the price goes in an unfavourable direction, this order comes into action, limiting further losses.
After either of these orders is triggered, the other order is automatically cancelled to allow efficient risk management.
Benefits of Bracket Orders
- Protects risk – Automatically takes care of possible losses.
- Locks in profit – Ensures gains are secured.
- Eliminates emotions – Avoids sudden trading decisions.
- Saves time – No continuous watching of the market is necessary.
Who Should Use Bracket Orders?
- Day Traders – Automates rapid trades.
- Swing Traders – Manages medium-term transactions.
- Algorithmic Traders – Optimises trading.
Conclusion
A bracket order is an excellent instrument for self-disciplined and automated trading. Whether a novice trader or a seasoned investor, using bracket orders can improve the execution of trade and enchance risk control effectively.
