Technical Analysis

Smart trading moves

| Updated on April 27, 2014


Bracket and trailing stop-loss are popular types of order execution for intraday traders. It provides effective order management and increases protection.

Let us look at a scenario an intraday trader faces frequently. If a trader buys stock X at ₹100 and has to place stop-loss and targets too, he will have to place two more orders manually — a target at ₹110 and stop-loss at ₹98. Now, he will face a the risk — if one of them gets executed, the other will remain pending. The pending order can get executed if the market moves towards that price. Hence, a new order that he didn’t intend gets executed.

Here’s a popular solution which has been privy to only institutions in India till now.

Bracket order

This is a two-legged order. While entering a position, one can also place a target and stop-loss order simultaneously. When one of the orders gets executed, the other gets cancelled automatically. So in the earlier example, one can place a bracket order to buy stock X at ₹100, along with a target order at ₹110 and stop-loss order at ₹98. When the stock is bought at ₹100, the other two orders are placed automatically, and if one of them gets executed, the other gets cancelled.

Trailing stop-loss

There is another typical problem faced by a trader. In the above example, assume that the stock price moved up to ₹108. But after showing a notional profit of more than ₹8 per share, it can come all the way down to ₹98, hitting the stop-loss and selling it with a loss.

Since the target order was placed at ₹110, it doesn’t get executed. The solution for this problem is a trailing stop-loss, wherein you can mention the quantum of trail. If the stock moves in your favour by the quantum you mentioned, then the stop-loss gets updated by the same amount.

In the above example, if the trader mentioned a trail of two points, when the stock moves up from ₹100 to ₹102, the stop-loss automatically gets updated to ₹100 (from ₹98). Similarly, when the stock moves to ₹108, the stop-loss gets updated to ₹106. So, if the the stock begins to fall, it will sell at ₹106, helping you book profits. This would not have been the case if the trail was not available.

The advantages a retail trader will enjoy is three-fold when the product is offered by brokerages. One, a bracket order ensures that you place both target and stop-loss at the same time and you don’t get into positions that you don’t intend to. Two, trailing stop-loss ensures that if any of your trades are seeing a profit, you don’t end up losing it. Three, is the increased leverage you can get from your brokerage. Since a stop-loss is compulsorily needed while placing the bracket order, the risk is reduced significantly.

The writer is Nithin Kamath, Founder & CEO, Zerodha

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on April 27, 2014
This article is closed for comments.
Please Email the Editor