If you are a trader and you do not understand simple trading strategies like stop loss orders, bracket orders and trailing orders, chances are that you are engaging in a very high risk trade. This could lead to massive losses and is not a wise strategy.
What is bracket order?
Among the few orders that we shall learn today is a bracket order. In a bracket order 3 orders are basically placed, but, not all are executed. It is extremely important to understand bracket order with an example.
Let us say that you want to place an order for the shares of Punjab National Bank and limit your losses and also take away profits, if you make a profit.
You first begin by placing an order. Let us assume you want to buy and not short sell. Let us say you place a buy order for 1000 shares of Rs 80 each for shares of Punjab National Bank.
The shares are bought at Rs 80. Now from hereon, two things could happen: either the shares could fall or the shares could gain.
When placing orders for buying PNB, you could have placed two more orders at the same time for sell.
One is to book profits and the other is to book losses. Let us assume you are happy with a profit of Rs 1 and would like to sell the PNB shares at Rs 81 and limit your loss to Rs 1 and sell if the share price drops to Rs 79. Now, whichever happens first is executed and the other is cancelled.
For example, if the share price reaches Rs 79 first, you make a loss of Rs 1000 and the book profit at Rs 81 is automatically cancelled. On the other hand, if after buying the stock at Rs 80, the share reaches 81 first, you make a profit of Rs 1000 and the other transaction of selling at Rs 79 to restrict losses is automatically cancelled.
Bracket orders are extremely important when you want to restrict your losses and also book profits.
How to place a bracket order?
Let us say you want to buy the shares of Reliance Industries at Rs 1000. You place a buy order at Rs 1000, click on the drop down of your broking software, where you see bracket order. Write the price on the stop loss order and also the price at which you want to book profits.
If you want to book losses at Rs 990 and profits at Rs 1010, which ever price is reached first after the buying price of Rs 1000, the shares will be sold. If it reaches Rs 1010, you make a profit, if it reaches Rs 990, you make a loss.