What Is a Bracketed Buy Order?
A bracketed buy order in securities trading is an instruction to buy that also contains both a sell limit order and a sell stoporder. The sell limit order gets priced above the buy order and the sell stop order, or stop-loss order,gets priced below the buy order.
These three-component orders areset at prices determined by the investor. It allows the investor to automatically lock in profits with an upside movement while preventing a downside loss, without having to monitor the position continually.
Bracketed buy orders are also used by day traders as a much-needed automated component for faster execution.
Key Takeaways
- Bracketed orders simplify securities trading since investors don't need to micro-manage their orders.
- The order includes a buy order, a sell limit order that is priced above the buy order, and a stop-loss order that is priced below the buy order.
- This kind of order allows traders to prevent losses on the downside while locking in profits if the price rises.
- A bracketed sell order has a similar structure to a bracketed buy order. This is used by short-sellers to reduce their potential losses.
Understanding a Bracketed Buy Order
As an example, suppose that a trader places a buy order for 100 shares of ABC Corp. at $50, along with a sell limit order at $55 and a sell stop order at $45. If the price moves up to $55 or down to $45, the position is sold. The trader either makes again of $5 with the sell limit or limits the loss at$5 with the stop-loss order.
It is important to note that there is no guarantee of execution at the sell-stop price. Once triggered, the stoploss turns into a market order and sells at the current market price after triggering. If the stock gaps to $40, for example, the stoploss would be triggered, and the investor’s shares would sell for around $40.
The investor may, however, benefit if the stock price gaps above their sell limit order. For instance, if ABC released favorable earnings after the market close, and the stock opened at $65 the following day, the investor would receive a fill close to that price, even though their sell limit order was$55.
While a bracketed buy order actually has three parts, there is usually no need to enter three separate orders. Most trading platforms include this function automatically.
Benefits of a Bracketed Buy Order
Flexibility
A bracketed buy orderis usually entered at the time of the initial trade but it can be set after a trade is executed.
For example, it is an ideal order type for an investor who has analyzed a stockanddetermined in advance where to place the stoploss and sell limit orders before executing the trade. Or, an investor could add a bracketed order to an existing open position in the expectation of volatility ahead of an earnings announcement.
Discipline
Investors may find it easier to stick to their trading plans if they use bracketed buy orders. Once the order gets placed, investors don’t have to take any further action and can simply wait for their stop loss or sell limit order to execute.
A bracketed buy order can also be easily programmed into an automated trading algorithm.
Bracketed sell orders are similar to buy orders, but they can only be made on margin.
Bracketed Buy Order vs. Bracketed Sell Order
A bracketed sell order is the reverse of a bracketed buy order. In this case, a short seller places a sell order that is bracketed between conditional buy orders: a buy stop order above the sale price, and a buy limit order at some distance below the sale price. The stop order limits the trader's losses, in the event of a sharp price increase, while the limit order allows them to lock in profits when prices fall below a certain point.
Since bracketed sell orders are used in short sales, they are more complex than bracketed buy orders. Bracketed sales are made on margin, meaning that the seller is borrowing the securities that they plan to sell.
What Is the Difference Between a Bracket Order and a Cover Order?
A cover order is an order designed to limit the trader's exposure to adverse price movements. Cover orders are similar to bracketed orders, in that they use a stop-loss order to automatically close out the trader's position when the price moves too far in an unexpected direction. However, cover orders do not lock in profits with a buy order below the sale price.
What Are the 4 Main Types of Trading Orders?
The main types of trading orders are market orders, limit orders, stop orders, and stop-limit orders.
A market order is the most straightforward type of order, and simply buys or sells an asset at the best available price.
A limit order is a conditional order that is only executed at a certain price or better.
A stop order is used to close out a trader's position if the price moves against them. This type of order only executes price rises or falls beyond a certain level.
A stop-limit order combines the characteristics of stop and limit orders: if the market price reaches the stop price, the stop-limit becomes a limit order.
Can Bracket Orders Be Cancelled?
Bracket orders can usually be canceled without penalty as long as the primary order has not been filled. If the primary order has been partially filled, the accompanying bracket orders will remain active until they are canceled, or until the end of the trading session.
Different brokers may have different rules, so this is worth confirming before setting a bracket order.
What Is a Bracket Order in Crypto?
Cryptocurrency exchanges offer bracket orders with similar rules and advantages to those available to stock traders. However, rules may vary between trading platforms regarding trading fees and cancellations.
The Bottom Line
A bracketed order is used to lock in profits or limit losses by surrounding the trade with two opposite-side orders. With this type of order, an investor can secure profits with an upside movement and protect against a downside loss, without having to constantly monitor the position.
Correction—May 17, 2023: A previous version of this article erroneously referenced a market order when defining a stop-limit order. It has been edited to reflect that if the market price reaches the stop price the stop-limit becomes a limit order.
