A Cover Order is a trading order that helps traders manage risk while taking advantage of market opportunities. It is a two-legged order that includes both an entry order and a compulsory stop-loss order. This means that when a trader places a cover order, they must also set a stop-loss limit in advance. This helps protect them from significant losses if the market moves against their position.
How cover order works
Cover order consists of two key items: entry order or stop-loss order.
Entry Order: The first order is meant to buy or sell an asset that puts you in a position in the market. It can either be a market order (which executes being the best available price at the moment) or a limit order (that executes upon the specified price or better).
Stop-loss order: A conditional order to be executed when the asset’s price reaches a certain stop price. Once triggered, it becomes a market order to exit the position to limit losses. Thus, stop-loss orders are invaluable from a risk management standpoint.
Benefits of cover order
Risk Management: The main advantage of the cover order is its ability to restrict possible losses. Traders, for instance, can predetermine a price beyond which they are willing to lose an amount based on the stop-loss order.
Automation: By using a cover order, the process of exiting a losing trade is automated. There would be no need to constantly monitor the event to prevent emotional decision-making, often resulting in a larger loss.
Convenience: With a cover order, a trader enters a trade while completing all processes, like setting the stop-loss level and making trading simple. This applies most especially to traders who do not have the luxury of time to sit in front of the computer continually checking for indicators.
A cover order helps traders manage risk effectively by automating entry and exit points, ensuring controlled losses and improved efficiency.