Cover Order vs Bracket Order: Key Differences

To manage their positions effectively in the unpredictable world of stock trading, intraday traders use various advanced order types. Two major ones are Bracket Order and Cover Order. These orders are used to help traders reduce risks and improve their trading strategies, particularly when the market is volatile. In this detailed article, we’ll look at how Bracket Orders and Cover Orders function, their differences, and how you can utilise them effectively.

Bracket Order

Bracket Orders are an important instrument employed by intraday traders. This order type is all about handling your transactions efficiently and smartly. When you place a bracket order, you are essentially putting three orders at once. This three-in-one order combines your primary order, stop-loss order, and target order.

Here’s an explanation of how it works:

Main Order:

This is where you choose whether to buy or sell a certain stock or investment. You are basically entering the market.

Stop Loss Order:

This is your safety net. You specify a price level at which you wish to limit your losses if the trade does not proceed as planned. It’s like having an emergency evacuation strategy in case things start to go wrong.

Target order:

This is where you establish your profit-taking limit. When the stock reaches this price, the system immediately sells your position, ensuring your profits.

Suppose you buy 10 shares of a firm at ₹120 per share. You set a stop-loss order at ₹110 to limit losses and a goal order at ₹150 to lock in winnings. Your buy order will be completed once the price reaches ₹120. If the price reaches ₹150, your target order will be executed, resulting in gains. If the price falls to ₹110, your stop-loss order will be triggered, reducing your losses.

But what if the price does not change at all? In that instance, if your initial buy order is not fulfilled, all three orders are automatically cancelled. So, it’s important to keep an eye on the market and make sure your initial order is executed.

Cover Order

Cover Orders, an essential tool in intraday trading, provide an easy approach to managing risks and capitalising on opportunities in the stock market. Unlike Bracket Orders, Cover Orders simplify the entire process by combining only two necessary components: the original order and the mandatory stop-loss order.

When you make a Cover Order, you create a purchase or sell order for a certain number of shares at the current market price. You also choose a stop-loss level to limit potential losses. This stop-loss order, once placed, cannot be cancelled or modified, underlining the significance of risk management in intraday trading.

The basic objective of a Cover Order is to prevent potential losses during volatile market situations. Setting a predetermined stop-loss level provides a safety net for your investments against adverse price swings. This risk management method assures that even if the market goes against your initial position, your losses are kept within specified limits.

Unlike Bracket Order, which includes a target order for profit booking, Cover Order concentrates entirely on risk minimization. While it may appear less complicated than Bracket Order, its simplicity makes it an appealing option for traders looking to speed up their trading process and reduce complications.

Let’s look at this example: You purchase 100 shares of a firm for ₹ 150 per share using a Cover Order. In addition to your buy order, you set a stop-loss order at ₹ 145 per share to limit losses. If the stock price goes below ₹ 145, the system will automatically execute a stop-loss order to close the position and prevent additional losses.

It is important to note that Cover Orders are normally only valid for the current trading session and cannot be carried over to the following day. This intraday nature of Cover Orders is consistent with the short-term trading objectives of intraday traders, who want to profit from price swings during a single trading day.

Key Differences: Bracket Order vs Cover Order

Having understood the definition of bracket orders and cover orders, and how both of them work, here are the key differences between the two types of orders.

Aspect	Bracket Order	Cover Order
Structural Variance	Comprises three parts: initial order, stop-loss order, and target order.	Consists of two parts: initial order and mandatory stop-loss order.
Purpose and Utility	Used for profit planning and risk mitigation. Traders can use a Bracket Order to define profit-taking levels (target order) as well as loss-cutting levels (stop-loss order).	Solely focused on loss mitigation. A Cover Order is purely intended to restrict prospective losses through the use of a stop-loss order.
Squaring off Mechanism	If both target and stop-loss orders are not executed by the end of the session, the system automatically squares off the position.	Squaring-off process is initiated solely by activation of the stop-loss order, regardless of the initial order status.

Conclusion

Bracket Order and Cover Order are crucial tools for intraday traders in the stock market. While Bracket Order is a multifaceted approach to profit booking and risk management, Cover Order is a simple but effective way to limit losses. Understanding the specifics and applicability of various order types allows you to make informed decisions and enhance your trading strategies.

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