Trading Up-Close: Bracket Orders

Controlling risk is a major component of any trading strategy. Bracket orders can help you automate risk management and reduce your emotional involvement. When you use brackets as part of your opening trade in Schwab’s Street Smart Edge platform, you can place a limit order for a stock at a price you set, and then bracket your exit strategy immediately upon execution. You can simultaneously help protect the downside with a stop order and position yourself to capture upside gains with a profit limit order. And this is a big difference from traditional orders, where you’d have to wait for your limit order to execute, and then place either a sell stop or a profit limit order, but not both.

Brackets are contingent, so only one end of your exit strategy can execute. This allows you to place both a profit-limit order and a stop order at the same time. Any trader who’s forgotten to set a stop order after buying stock will quickly recognize how helpful brackets can be. They can allow you to walk away from your trades with your emotions in check.  You’ve analyzed and put your trade in motion. You don’t have to monitor it, you can just stick to your plan. It’s important to keep in mind that while bracketing can help with risk management, stop orders will not protect you from a gap in prices during market hours or from one regular session to the next.

To start a new position with a bracket, a trader needs to first establish profit and loss targets. While some traders will analyze a chart to set these price levels, it can be effective to simplify the process and exit based on a specific dollar or percentage amount instead. Let’s look at an example of a primary order to buy, incorporating brackets: A stock is currently trading near $53, but has been trading in a range between $52 and $58. Working with this range offers provides some parameters for a bracket order.

You could place a buy limit order below the last trade--say $52, and set a stop order at $51 to attempt to limit your loss to $1.00 per share, should the price move lower. At the same time, you can place a profit limit order at the top end of the range, $58, which the stock has recently hit twice before retreating.

Remember, you can use bracket orders with a short sale as well. Brackets can also be added to an existing position at any time. Some traders like to add brackets to equal portions of a position at various prices. This laddered approach to exiting can help to protect your capital as markets move against you, or boost your profit when things move in your favor.

Another key benefit to brackets is that they don’t expire! A traditional stop, stop-limit, or limit-sell order set as ‘Good till Canceled’ has a default expiration of 180 calendar days. But a bracket order remains open until your price is met, or you cancel it.

So, to summarize, bracket orders are just one more risk management tool that can help you preserve your trade capital. They let you set predefined price triggers for your stop-loss or profit-taking exits. They offer flexibility – you can place them along with a limit order or on an existing position. And they are automated, so you aren’t tethered to your screen. When you include brackets with your limit entry order, your entry and exit orders are queued up and ready to be activated. To learn more, watch the other videos in this series and subscribe to our You Tube channel.