A stock market bracket order is a type of order that helps to limit both the downside and upside risk while trading. It sets predefined price levels to protect profits or limit losses on an open position. The bracket order comprises the target, stop-loss, and limit orders.
It helps to mitigate risk and maximise gain potential. What is bracket order, i.e., bo meaning in trading? Let us understand this in this blog.
Table of Content
What is a bracket order?
With a bracket order, a user may take an intraday position and benefit from more exposure while still being protected by a stop-loss order and a profit target (profit booking) order.
The system will execute three orders at once:
- a limit order (first leg),
- a stop-loss market order (second leg), which would only trigger at the specified stop-loss trigger price, and
- a profit objective limit order (third leg) would only trigger at the specified profit objective price.
If the stop-loss trigger price is hit, the third leg of the order is immediately cancelled, and the stop-loss order is executed as a market order. Similarly, the stop loss is lifted when the profit target trigger price is reached.
The simultaneous placement of all three orders is known as a bracket order. With bracket orders, traders may book gains at their stated target price while limiting any possible losses on a trade.
How does it work?
To further grasp this, let us look at an example of bracket order:
Consider a person placing a limit order to purchase Rs. 100 worth of a company’s shares. The trader places a stop-loss at Rs. 93 per share and a target price of Rs. 106 per share.
The initial order is restricted by two price limits, upper and lower. At any given deal, only one price level will be executed.
Scenario 1:
If the share price increases to Rs. 106, the upper limit is executed, and the stop-loss is cancelled.
Scenario 2:
In the opposite scenario, the stop-loss is triggered, and the upper limit is cancelled if the share price drops to Rs. 93.
Scenario 3:
A third possibility is that the order will not be placed. There is a possibility that the share price will not reach the initial price level of Rs. 100 while using a bracket order, which is a limit order. In that case, the trader will not even buy the shares.
However, if no order is placed in any of the three scenarios, the broker will cancel the bracket order at the end of trading hours.
What advantages do bracket orders offer?
The advantages of bracket orders are numerous.
Traders can place three orders at once. It is helpful for intraday traders to square off at successful positions, given their constrained trading window.
Additionally, traders can employ a trailing stop-loss, which enables the stop-loss level to change in real-time in response to price movement and direction.
It enables traders to lower their intraday order risk.
Conclusion
Now that you know what bracket order is, it is crucial to comprehend whether or not you must invest in them. Anyone must only make such orders if they are fully knowledgeable about the stock market’s operations and the intraday trading’s ins and outs.
