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

Published on April 27, 2014

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