What Is a Bracketed Buy Order?
Bracketed buy order refers to a buy order that has a sell limit order and a sell stop order attached. The sell limit order gets priced above the buy order and the sell stop order, or stop-loss order, gets priced below the buy order. These three-component orders are set at a price determined by the investor, typically when the order is entered. This type of order allows investors to lock in profits with an upside movement and prevents a downside loss, without having to monitor the position continually.
Understanding Bracketed Buy Order
For an example of a bracketed buy order, suppose that an investor places a buy order for 100 shares of ABC at $50, along with a sell limit order at $55 and a sell stop order at $45. If the price moves up to $55 or down to $45, the position is sold. The trader either makes a gain of $5 with the sell limit or restrains the loss at $5 with the stop-loss order.
It is important to note that, if the trader places the stop-loss order at $45, there is no guarantee of execution at that price. This is because, once triggered, the stop loss turns into a market order and sells at the current market price after triggering. If the stock gaps down to $40, for example, the stop loss would be triggered, and the investor’s shares would sell for around $40.
Investors may, however, benefit if the stock price gaps above their sell limit order. For instance, if ABC released favorable earnings after the market close, and the stock opened at $65 the following day, the investor would receive a fill close to that price, even though their sell limit order was $55.
Advantages of a Bracketed Buy Order
- Flexibility: A bracketed buy order can be set before or after a trade gets executed, which gives investors flexibility. For example, it is an ideal order type for investors who have analyzed a stock and determined where they want to place their stop loss and sell limit orders before they execute the trade. Alternatively, investors could add a bracketed order to their existing open position if they are expecting volatility ahead of a major company announcement.
- Discipline: Investors may find it easier to follow their trading plans by using a bracketed buy order. Once the order gets placed, investors don’t have to take any further action and can simply wait for their stop loss or sell limit order to execute. A bracketed buy order can also be easily programmed into automated trading algorithms.