Bracket Order vs Cover Order

Introduction:

Bracket order and cover order are the types of intraday orders that traders use to manage their losses through a combination of multiple orders. Both these types of orders involve the use of an initial buy or sell order followed by additional orders that control the downside. Let’s take a look at both of them in detail.

Understanding a Bracket Order

A bracket order is a combination of a normal order, a limiting stop-loss order, and a target order. If the initial order is a buy order, the remaining 2 orders will be selling orders and vice versa. Here’s how it looks:

Bracket order = Initial order (buy or sell) + Stop-loss order (sell or buy) + Target order (sell or buy).

Through this arrangement, a trader squares off a profitable position by the end of a trading session (through the target order) and controls the potential loss (through the stop loss order).

It is important to note that all three orders are not executed in one bracket order. With the initial order, either a target order or a stop-loss order is executed depending upon the direction of the trade, and the other order is cancelled.

Let us understand this better with a simple example:

Let’s say you place an initial buy order for a certain number of shares at ₹100 and you expect this price to reach ₹120. So, you add a target order that will get executed at ₹120 and a precautionary stop-loss order for ₹95, should the price end up falling. Notice how the stop-loss is always closer to the initial order price to limit the loss.

The initial order executes as soon as the share price touches ₹100 and if the price rises further as expected, the target order of ₹120 also gets executed. This obviously means that the stop-loss order of ₹95 remains unexecuted as the price didn’t drop at all and hence, this stop-loss order gets cancelled.

Similarly, if the trade does not go as expected and the price drops, the stop-loss order gets triggered instead and the target order gets cancelled.

And when the initial order does not get executed, the trader cancels the entire bracket order.

Understanding a Cover Order

The difference between a cover order and bracket order is that a cover order compulsorily includes a stop-loss order and does not involve a target order. A cover order, therefore, looks like this:

Cover order = Initial order (buy or sell) + Stop-loss order (sell or buy).

Even in this case, the initial order and the stop loss order are opposite. So, if one is a buy order, the other will be a sell order depending upon the direction of the trade. Cover orders can be placed for both, long trades and short trades. In the cover orders, the stop-loss orders cannot be cancelled.

Let us quickly understand with the help of an example:

Let’s say you wish to buy a certain number of shares at ₹100. To accompany the market order, you place a stop-loss order to sell at ₹95 so that you incur a maximum loss of ₹5 if the share price starts falling after you buy the shares.

When the initial order gets executed, the sale order will be placed when the stock price hits the desired level. If the stop-loss order is not triggered, the system will square off the entire order before the cut-off time.

Key Differences: Bracket Order vs Cover Order

1. A bracket order has 3 legs, whereas a cover order has 2 legs.
2. A bracket order is used to plan profit & loss, whereas a cover order is only used to control the loss.
3. In a bracket order, the position gets squared if the target order and stop-loss order are not executed. In a cover order, squaring off is dependent on the stop loss order.

FAQs

Are bracket orders and cover orders available on both exchanges?

Bracket order is available on the NSE as well as the BSE, whereas cover order is only available on NSE.

How long is the validity of bracket order and cover order?

Since these are intraday strategies, their validity is 1 day.

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