A critical component to any trading strategy is risk management, which helps you manage potential gains and losses. You may already be familiar with risk management tools such as traditional stop orders (stop-loss orders), stop-limit orders, and trailing stop orders. But beyond these risk management tools are bracket orders, accessible through advanced trading platforms like Schwab's StreetSmart Edge®.
How brackets work
Bracket orders can be used to establish three types of conditional exits: a profit exit, trailing stop exit, or stop loss exit. If the condition is met, a market order is automatically sent to exit the position.
For example, you have an equity position of 500 shares at a current stock price of $45.00. With a bracket, you can define:
- a profit exit to trigger when the bid price reaches $50.00,
- a trailing stop exit to trigger when the position moves against you by 2 points (or $2) from the highest point reached,
- and/or a stop loss exit to trigger a market sell order when the price reaches $44.00.
Given that the exit orders associated with your bracket are mutually exclusive, if one triggers, the others bracket legs will be canceled.
Three advantages of bracket orders
- Brackets provide protection against losses and can help lock in profits by bracketing an order with a stop loss, a trailing stop, and a profit target. If one condition is met, an order is automatically sent to exit the position. This automates your exit strategy—regardless of whether the market goes up or down—and helps you separate actions from emotions.
- Bracket orders give you the flexibility to set up a plan before or after establishing a position. You can place equity and option orders with predefined profit and loss exit points or conveniently add a bracket after the order has been placed.
Consider this scenario: You've owned 1,000 shares of a company for a couple of years and anticipate some risk. You could add a bracket for all or just a portion of your position—say 300 shares. You're not required to do it for the full number of shares. Either way, bracket orders give you automated risk protection for your open positions.
- Bracket orders are automated, potentially making your trading more efficient. If profit or loss targets are met, an order to close the designated portion of your position will be submitted even if you're away from your trading platform.
The bottom line
Implement your trading strategy efficiently and while helping to minimize risk and keeping your emotions out of the picture using bracket orders.