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Advanced Techniques for Futures Trading: Bracket Orders

, | January 24, 2019 | By

Among the many advanced trading strategies that traders employ in the futures markets, bracket orders are among the most powerful. Brackets promote trade-related efficiency, streamlining the process of entering and exiting the market. Whether you’re a commodity, bond, or currency trader, the functionality of bracket orders can help take the guesswork out of managing your open positions in live market conditions.

What Are Bracket Orders?

A bracket order is a trade management device that automatically places profit target and stop loss orders upon the market in accordance with predefined parameters. They’re a feature commonly found within a software trading platform. Brackets consist of three primary elements and may be employed at your discretion via the following process:

  1. Entry order: An entry order is placed upon the market at a desired price point or level. This order may be a stop market, stop limit, limit, or market order. Its function is to open a new position in the live market.
  2. Profit target: Upon the entry order being triggered, another order is simultaneously placed at a level deemed worthy of securing a profit. This order is referred to as the bracket’s profit target and may be of a limit or market-if-touched order variety.
  3. Stop loss: In the same fashion as the profit target, a stop loss order is placed at market immediately upon entry. The stop order protects the downside of the open position and quantifies risk exposure. It may exist as a stop limit or stop market order.

The benefits of advanced trading strategies that incorporate brackets are extensive. These types of strategies emphasize efficiency and precision, affording traders several advantages:

  • Risk management: Through having a finite profit target and stop loss, risk is effectively quantified. The maximum upside and downside of a trade is predefined, thus limiting risk exposure.
  • No guesswork: Bracket functionality is automated. After placing the entry order, linked profit targets and stop losses are automatically placed at market by the software trading platform. The human element is effectively removed from active trade management.
  • Efficiency: Client-side latency is reduced exponentially. Reduced slippage and seamless market entry/exit may be achieved as latencies associated with manual order entry are avoided.

Brackets are ideal for many styles of trading, including trends, reversals, and breakouts. If implemented properly, they’re a valuable tool in a trader’s arsenal.

Any trades are educational examples only. They do not include commissions and fees.

Bracket Orders in Action

Within the context of bracket order advanced trading strategies, price action is the primary determinant of a trade’s success. If a beneficial movement of price befalls the trader, then the profit target is hit, and a net gain is realized. In the event price takes an adverse course, the stop order is triggered, creating a net loss. The following example illustrates the progression of a basic bracket order strategy for the E-mini S&P 500:

  1. Entry: Veteran futures trader Kel believes a bullish breakout is brewing for the March E-mini S&P 500 from just above the 2500.00 level. Kel places a buy stop-limit bracket order at 2500.25. According to the desired trade management parameters, a 1:2 risk vs. reward scenario is appropriate. Kel designs a bracket specifying a 24 tick profit and 12 tick loss within his trading platform and placed upon the market.
  2. Election: Buyers enter the market en masse, driving price to Kel’s entry of 2500.25 and electing the resting stop-limit buy order. The new long position is immediately opened, automatically sending linked profit target and stop loss orders to market. A limit order is placed at +24 ticks from entry (2506.25), while the corresponding stop-market order is put down at -12 ticks from entry (2497.25).
  3. Trade management: Once the bracket order has been placed upon the market and subsequently elected, Kel’s work is essentially done. Price will either hit the profit target or stop loss order, locking in a net gain or loss.

This trade in the E-mini S&Ps is a basic example of a static bracket order strategy, with profit targets and stop losses remaining at the same price points as the trade evolves. However, futures traders use many advanced trading strategies designed specifically for brackets. Laddering, trailing or break-even stops, and scaling in and out of positions are a few of the most frequently utilized.

Powerful Advanced Trading Strategies for Futures

When it comes to active futures trading, you’re only as good as your execution. Bracket orders help streamline active trade management, boosting efficiency significantly.

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