Using a Bracket Order

A Bracket Order can be used to partially automate the management of a trade once it is entered. Depending on your Broker, you may also see it called a "One Cancels Another Order" (OCA), or a "One Cancels the Other Order" (OCO).

There may be other names used with your specific Broker, but these are the names I have seen used on the accounts I have, and have had over the years.

A Bracket Order is entered with a profit target and a stop loss in one order. If one order is triggered and executed, the secondary order is automatically canceled. Since a condition must be met before a trade is triggered, it is also called a Conditional Order.

This type of order can be automatically entered at the same time the initial "Sell Short" or "Sell to Open" order is placed, or you can add the Bracket Order once your initial shorting trade is executed. (depending upon you broker of course)

If you are trying to automate your trading as much as possible, having it all entered at once may be the way to go. You'll have to test out each method to see what works best for you.

Let's take a look at an example below which displays the steps and timeline involved when using this type of order:

Bracket Order

You can see in the example above that once Bills order to go long and buy shares of XYZ is filled at $24.00 per share, he then enters the Bracket Order with an upper profit target (Sell Limit) at $26.00 and a lower Stop Loss (Sell Stop) at $22.00.

Note that the "Sell Stop" order can be a limit or a market order, depeneding on which one you prefer to use. Some brokers allow you to add additional conditions such as "Limit-if Touched" or setting the "Limit" price to the Bid, Ask or Last.

The amounts to use for the profit target and stop loss can vary and will depend on your personal choices. The amounts used in the example are for illustration purposes only.

As the example shows, once the price of XYZ hits $26.00, the Sell Limit Order is triggered and his shares are sold. The remaining Stop Loss Order is then canceled automatically.

If the price of XYZ declined instead of rising, and reached $22.00, then the Stop Loss Order would have been triggered, shares sold at the Market, and the Sell Limit Order would have been canceled automatically.

Using a Bracket Order can be helpful by taking some of the emotions out of your trade management by not having to decide when to exit an open position. The potential exits can be determined ahead of time, before entering the trade.

Another benefit of using this type of order is that you will have the order in with your broker once it is entered. If you are Day Trading or Scalping and have a power outage or internet connection problems, the order will already be in. You won't have to worry about getting an order in at the last minute if the price suddenly moves against you.

Keep in mind that having automated orders does not mean that they will get filled at the exact price levels you expect. There will be times when "Slippage" occurs (a filled price different than what your order specifies). This can happen due to other orders being filled ahead of yours at better prices due to other orders being placed before yours.

You may also run into orders not getting filled when you thought they should have. For example, XYX reaches $26.00, but only briefly. Other orders get filled ahead of yours, but there may not be enough shares offered to fill yours also. In this case, the share price would decline and your order would not get filled.

For this reason it is not a good idea to use round numbers or common support and resistance levels as your target prices. In our example above, you could have used $25.95 instead of $26.00 and had an increased chance of getting filled in case of a reversal at $26.00.

You can also run into only partial orders being filled. In this case, you may see partial profits obtained and at the same time the opposite protection order may be canceled. Now you could be left holding shares and no stop order in place. Be sure to check and see if your broker's order system will make adjustments to the number of shares if partial fills occur and keept the protection order live.

If you decide to use a Bracket Order, make sure you use it to your advantage by letting it work. By that I mean, don't enter the Bracket Order and then move the price levels after the order is entered. Leave it set the way it is, as you have already determined to work for your trading style. Otherwise, you will be losing the benefit of the trade management being automated by involving your emotions.

Ultimately, the choice to use or not to use a Bracket Order is up to each one of us. We all have different trading styles, personalities and needs for assistance in different areas. A good idea would be to test out using this type of order using a simulated trading account to get used to using it before using it on live trades.

Also, you must check with your Broker to see if there are any restrictions or limitations on specific stocks that can or cannot be used with this type of order.




Related "Using a Bracket Order" Pages on This Site:

Return From "Bracket Order" To "Stock Trading Risk Management"


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