What Is a Bracketed Buy Order?
A 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.
- A bracketed buy order is a type of securities order placed by a trader that has a three-part structure.
- Bracketed orders simplify the process of securities trading, since investors don't need to micro-manage their orders.
- The order includes a buy order, a sell limit order that is priced above the buy order, and a stop-loss order that is priced below the buy order.
- This kind of structure appeals to traders who want to be able to protect their potential for losses on the downside while locking-in their profits if the price rises.
- A bracketed sell order has a similar structure to a bracketed buy order. This is used by short-sellers to reduce their potential losses.
Understanding a Bracketed Buy Order
For an example of a bracketed buy order, suppose that a trader 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.
While a bracketed buy order actually has three parts, there is usually no need to enter three separate orders. Most trading platforms include this function automatically.
Benefits of a Bracketed Buy Order
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.
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.
Bracketed sell orders are similar to buy orders, but they can only be made on margin.
Bracketed Buy Order vs. Bracketed Sell Order
A bracketed sell order is the reverse of a bracketed buy order. In this case, a short seller places a sell order that is bracketed between conditional buy orders: a buy stop order above the sale price, and a buy limit order at some distance below the sale price. The stop order limits the trader's losses, in the event of a sharp price increase, while the limit order allows them to lock in profits when prices fall below a certain point.
Since bracketed sell orders are used in short sales, they are more complex than bracketed buy orders. Bracketed sales are made on margin, meaning that the seller must borrow the securities that they plan to sell.
What Is the Difference Between a Bracket Order and a Cover Order?
A cover order is an order designed to limit the trader's exposure to adverse price movements. Cover orders are similar to bracketed orders, in that they use a stop-loss order to automatically close out the trader's position when the price moves too far in an unexpected direction. However, cover orders do not lock in profits with a buy order below the sale price.
What Are the 4 Main Types of Trading Orders?
The main types of trading orders are market orders, limit orders, stop orders, and stop-limit orders. A market order is the simplest type of order, and simply buys or sells an asset at the best available price. A limit order is a conditional order that is only executed at a certain price or better. A stop order is used to close out a trader's position if the price moves against them: this type of order only executes price rises or falls beyond a certain level. A stop-limit order combines the characteristics of stop and limit orders: if the market price reaches the stop price, the stop-limit becomes a limit order.
Can Bracket Orders Be Cancelled?
Generally speaking, bracket orders can be canceled without penalty as long as the primary order has not been filled. If the primary order has been partially filled, the accompanying bracket orders will remain active until they are canceled, or until the end of the trading session. Different brokers may have different rules, so this is worth confirming with your broker-dealer before setting a bracket order.
What Is a Bracket Order in Crypto?
Cryptocurrency exchanges offer bracket orders, with similar rules and advantages to the bracket orders that are offered by stockbrokers. However, rules may vary between trading platforms with respect to trading fees and cancellation.
The Bottom Line
A bracketed order is a type of trade used by market professionals to limit potential loss and lock in profits by surrounding the trade with two opposite-side orders. A bracketed buy order has a sell limit order priced above the buy order and a sell stop order (or stop-loss order) priced below the buy order. With this kind of structure, an investor can secure profits with an upside movement and protect against a downside loss, without having to constantly monitor the position.
Correction—May 17, 2023: A previous version of this article misstated the definition of a stop-limit order.