A:

Once you've identified a security that you want to purchase, you need to determine a price at which you want to sell if the price heads in an adverse direction and a price at which you want to take profits when the price moves in your favor. In many cases, this data is relayed to the broker using three separate orders.

First, you will buy a security using either a market or a limit order. Then, you will enter a stop-loss order, which tells your broker that you do not wish to hold the asset when the price moves beyond a certain level. If you have a target price in mind, you will then enter another order telling your broker when you wish to take your profits. That's a lot of orders! Many brokers have started using a special type of order that simplifies this process by allowing the trader to enter all the data contained in the above orders using only one transaction. This order is generally known as a bracket order, but some brokers may use different terminology.

A bracket order can be found in one of the following formats:

A bracketed buy order enables you to attach a stop-loss below the entry price, and a sell limit order above the entry at the price where you wish to take profits. This is the type of order you would use if you found yourself in a situation where you wanted to buy a stock at $30, sell it when it reached $35, but didn't wish to hold the stock if it fell below $27.

A bracketed sell order allows you to attach a stop-loss above the entry of a short position and a limit order below the entry price where you wish to take profits. If you believed that the price of the $30 stock mentioned above was going to go down, you would attach a bracketed sell order to protect your position.

To learn more about different types of orders, see The Basics of Order Entry.

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