What is a Bracketed Sell Order?
A bracketed sell order is a short sell order that is accompanied (or "bracketed") by a conditional buy order above the entry price of the sell order and a buy limit order below the entry price of the sell order. As the three component orders are based on set prices, this type of order seeks to help cover some of the caveats of the short sell order while also locking in profits.
Understanding Bracketed Sell Orders
A bracketed sell order is a kind of conditional order. Conditional orders help investors to initiate trades with specified prices. Some conditional orders, like a bracketed order, can have multiple conditions. Bracketed sell orders are used when a trader is looking to enter a short position with a predictable profit and loss range.
A typical bracketed sell order will work as follows. A trader wants to short stock ABC, which is currently trading around $20 a share. The main component of the trade is short position which is placed at $20 and profits if the stock goes down in price. The profit on this order is capped at $5 with a low-side buy limit order at $15. The buy limit order is for the same quantity as the sell order, so it closes out the position once the profit target is reached. On the loss side, a high-side buy stop order is placed at $25 so that the trade closes out for a $5 per share loss if the price action goes against the trader's position.
- A bracketed sell order has three components: a short sell order at a specified price, a buy stop order above the sell order's entry price and a buy limit order below the entry price.
- The price distance between the brackets represents the potential profit and loss range on the trade.
- Using bracketed sell orders can help traders stick closely to their trading plan.
Bracketed Sell Orders versus Bracketed Buy Orders
A bracketed sell order is more complex than its counterpart, the bracketed buy order. Both types of orders are based on the ability to specify a maximum range for gains and losses, but a bracketed buy order is somewhat simplified since it involves a buy limit order with a limit sell order above the buying price to guarantee a profit and a stop loss order below the buying price to manage losses.
A bracketed sell order is more complex because it involves a short sell order which requires borrowing on margin. In a bracketed sell order, the trader first determines a short sell price at which they wish to sell. They enter into a contract to sell short. They then bracket that order with a buy order at a specified price above the short sell price and a buy limit order at a specified price below the short sell price. In practice, however, most trading platforms have automated the order placement, so the trader just specifies the range of the bracket.
Why Use a Bracketed Sell Order?
The biggest advantage of bracketed sell or buy orders is that they have discipline built right into them. A trader simply needs to enter trades according to the trading plan and then they run exactly as designed. Without defined entry and exit points, traders are often tempted to chase the market or hold a losing position in hopes of a turnaround. Bracketed orders remove that temptation. If a trader is seeing consistent losses while using bracketed order, then the trading plan is flawed, not the execution of it.