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.

BREAKING DOWN '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. (To learn more about trading discipline, see: The Importance of Trading Psychology and Discipline.)
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