Using A Bracket Order To Mitigate Risk

When you use a Bracket Order in your trading strategy you are attempting to limit your losses and lock in potential profits by “bracketing” an order with dual opposite-side orders being placed simultaneously. These types of orders can be used to partially automate the management of a trade after you have entered into it. 

Bracket Order
Automate Your Trading And Limit Losses With A Bracket Order

An order to buy is bracketed by a high-side Sell Order and a low-side Stop Order. And order to sell a security is bracketed by a high-side buy Stop Order and a low-side Buy Order. Bracket Orders can also be referred to as OCO (One Cancels the other Order) or OCA (One Cancels Another).

As Bracket Orders contain a profit target and stop loss in one order, if one order is triggered and executed, the the second order is canceled automatically. Bracket Orders may also be called Conditional Orders as a condition must be met prior to a trade being triggered.

Example Of A Bracket Order

When using a Bracket Order you must first decide the amount you would like to use for the profit and stop loss. By automating your trading, you are more likely to stick to your trading plan and realize success in your investments. Using a Bracket Order also frees you from having to monitor a security constantly, as trades are executed automatically.

If you have entered into a long position at $30 per-share, you may wish to enter your Bracket Order with an upper profit target, the Sell Limit, of $32 and a lower stop loss, the Sell Stop, of $28. The Sell Stop Order can either be a Market or Limit Order, and which one you use will depend on your personal preference.

If the price of the security reaches $32, then the Sell Limit is triggered and your shares will be sold. The Stop Loss Order that remains will then be automatically canceled. If the price were to fall rather than rise, once the price reached $28 the Stop Loss Order will be triggered, and the shares sold. The Sell Limit Order would then be canceled.

Benefits And Drawbacks To Using A Bracket Order

The main benefit to using a Bracket Order in your trading strategy is that with the potential exits determined ahead of time, the emotion has been eliminated from your trading. You have already determined your desired exit points prior to entering a trade.

When using a Bracket Order you are also insuring against the unpredictable, such as a power outage or lost internet connection, as the order is placed with your broker immediately. You also will not have to be concerned with getting an order in quickly if a stock’s price suddenly moves against your position.

A disadvantage to using a Bracket Order is that the orders may not get filled at the exact price specified. This occurrence, known as Slippage, can happen due to other orders being filled ahead of yours at a better price. There is also the risk that orders may not get filled when you think they should.

This is most common when a security’s price reaches your preset level but only for a brief time. Order may get filled ahead of yours, and there may not be enough shares left to fill your order as well. In this instance, the price of the shares will fall, but your order may not be filled.

The decision to use a Bracket Order will be a personal one, and will depend on your trading style, personality, and risk-tolerance. The most important think to remember when using these types of order is to let them work! Leave your bracket orders set to the levels you have determined for your trading strategy, or risk being influenced by your emotions.