Bracketed Buy Order

What Is a Bracketed Buy Order?

A bracketed buy order refers to a buy order that has a sell limit order and a sell stop order attached. The sell limit order gets priced above the buy order and the sell stop order, or stop-loss order, gets priced below the buy order.

These three-component orders are set at a price determined by the investor, typically when the order is entered. This type of order allows investors to lock in profits with an upside movement and prevents a downside loss, without having to monitor the position continually.

Understanding a Bracketed Buy Order

For an example of a bracketed buy order, suppose that an investor places a buy order for 100 shares of ABC at $50, along with a sell limit order at $55 and a sell stop order at $45. If the price moves up to $55 or down to $45, the position is sold. The trader either makes a gain of $5 with the sell limit or restrains the loss at $5 with the stop-loss order.

It is important to note that, if the trader places the stop-loss order at $45, there is no guarantee of execution at that price. This is because, once triggered, the stop loss turns into a market order and sells at the current market price after triggering. If the stock gaps down to $40, for example, the stop loss would be triggered, and the investor’s shares would sell for around $40.

Investors may, however, benefit if the stock price gaps above their sell limit order. For instance, if ABC released favorable earnings after the market close, and the stock opened at $65 the following day, the investor would receive a fill close to that price, even though their sell limit order was $55.

Advantages of a Bracketed Buy Order