What is Bracket Order and how to use it for day trading?



Many part time traders cannot do day trading efficiently with full time job at hand even though they have the ability to do the market analysis . Usually the reason for failure can be:

  • Wrong trading strategy or technique or approach - This includes money management, trading psychology , stock selection , wrong entry/exit etc. Basically analysis and psychology part of the trade
  • Second reason for failure is not able to track the orders properly (target and stop loss orders) once the position is initiated. This includes need of constant follow up with broker or online checking to know the status of your stop loss and target orders and not able to cancel the stop loss order when target is met or vice versa

The first reason for failure is more to do with the analysis side and second reason for failure is more to do with trade execution side. Let us assume that the part time trader does his stock analysis before market open and has his entry and exit points in mind along with his stop loss. For such a well prepared trader use of Bracket Order will avoid the execution risk to great extent. In India only few brokerages provide Bracket order feature and that too only for limited securities. In most of the advanced market in the world bracket order is a default feature in trading software.

What is Bracket Order?

Bracket Order is a group of orders placed simultaneously which includes entry order wherein trading position gets initiated, target order to lock in profit and stop loss order to limit your losses in case market goes against you. The best part of bracket order is if either of target or stop loss order gets executed the other order automatically gets cancelled and you don’t need to manually cancel the pending order. Therefore target and stop loss order has One Cancels Other effect when any one of them gets executed. Also note that until entry order is executed the other two order are not placed in the system and only on entry order execution the other 2 orders gets placed in the system.

Now let us take couple of scenarios to explain this concept and also how this is useful for part time day trader.

Bullish Scenario:

Ram is a trader who has a full time day job. He did a quick analysis before market open and concluded that 6800 is good resistance level for Nifty and in case 6800 level is crossed intraday then it would test 6830.

So the potential trade after analysis is “Buy Nifty future @ 6805 , Target 6830 and Stop Loss 6795”.

In normal circumstances he would have called up his broker and ask him to place a Buy Stop order at 6805 and then keep calling his broker to know whether his order is executed. If he is an online trader then he tracks the order online. As he has day job sometime tracking becomes difficult. When he is busy with his work his order might get executed and now he has position open without target or stop loss orders. Let us say that his broker called him when his order got executed and now Ram asks his broker to place a Sell Limit order at 6830 (target order) and Sell Stop order at 6795 (Stop loss order). Now in case any of the order gets executed he has to manually cancel the other order or ask his broker to do so which might be risky as he would be busy with other clients.

Now let us see how Bracket Order works and eliminates most of the execution risk .

  • Entry order - create a Buy Stop order @6805
  • Target order - create a Limit Sell order @6830
  • Stop Loss Order - create a Stop Sell order @6795

Let us see how it works

  • When you place the buy bracket order first the entry order is placed. Only on execution of entry order the remaining two orders i.e target and stop loss orders gets placed. Until entry order is executed the other 2 orders are not placed and you will not see them in order book
  • Now if market moves as per Ram’s analysis and goes beyond 6830 points the Target Order gets executed and the profit is locked in. Now the Stop Loss order gets cancelled
  • If market doesn't move as per Ram’s expectation and goes below 6795 points the Stop Loss order gets triggered and executed. The Target order gets cancelled

Bearish Scenario:

Ram does a market analysis during market open and concludes that if Nifty goes below 6750 points intraday it would test 6720 points.

So the potential bearish trade after analysis is “Sell Nifty future @ 6745 , Target 6720 and Stop Loss 6755”.

The sell bracket order would work like this.

  • Entry order - create a Sell Stop order @6745
  • Target order - create a Limit Buy order @6720
  • Stop Loss Order - create a Stop Buy order @6755

Following are some of the points to be considered

  • When you place the sell bracket order first the entry order is placed. Only on execution of entry order the remaining two orders i.e target and stop loss orders gets placed. Until entry order is executed the other 2 orders are not placed and you will not see them in order book
  • Now if market moves as per Ram’s analysis and goes below 6720 points the Target Order gets executed and the profit is locked in. Now the Stop Loss order gets cancelled
  • If market doesn't move as per Ram’s expectation and goes above 6755 points the Stop Loss order gets triggered and executed. The Target order gets cancelled

Even for traders who have multiple positions open intraday Bracket order is a feature that can be useful. Also this forces the traders to have Stop Loss and prevents them from huge losses if used wisely. Bracket orders supports trailing stop loss also.

My broker has just activated bracket order feature and only for Nifty & Bank Nifty futures and for intraday trades.Hope in coming days most of the brokerages in India would have bracket order feature available as default in trading softwares and can be used on most of the securities.


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