Cover Order

By Rohit Malik

December 1, 2020


What is a Cover Order?

A Cover Order is a two-legged order where the trader simultaneously decides the initial buy/sell order (which can be the market order or limit order) along with the stop-loss order. Think of it as the order that helps the trader in deciding their initial point and exit point in the market.
To further break it down for you, understand that a Cover Order consists of 2 important components of trading put to use at the same time:
1. Initiating Position – This order can be the market order or limit order to enter into the market.
2. Stop Loss Order – This order will be the final exit point of trading through buying or selling. The Stop Loss Order set initially can be changed later, but cannot be canceled.

How does a Cover Order Work?

Cover Order works best by maximising the profit between the entry point and the Stop Loss Order.

The entry point of a Cover Order can be placed through a Market Order or a Limit Order:

  • Market Order – A Market Order is where a trader wishes to buy or sell the stocks immediately at the best available current market prices. It is the simplest of all orders. In this case, the speed of completing the trade takes precedence over the price of the trade.
  • Limit Order – A Limit Order is where a trader will only enter the trade if the desired price level or better is achieved. Limit orders set the maximum or minimum price at which the trader is willing to buy or sell. Needless to say, in the case of Limit Orders, the price of trade takes precedence over the speed of completing the trade.

So, when the trader initiates the trade, the buy/sell order is always either a Market Order or a Limit Order. This entry point is accompanied by a compulsory pre-decided Stop Loss order, both within a specified range. Once the Stop Loss trigger price is hit, the Stop Loss order gets executed immediately as a Market Order. This is the perfect risk-minimizing mechanism for day traders. Once the trader enters the market, only the Stop Loss Order determines when the transaction shall be reversed. That can happen only if the price of an asset reaches
that predetermined limit. Say for example, if a stock is purchased at Rs. 200 and the Stop Loss Order price is set at Rs. 190; then shares will automatically be sold if its price reaches Rs. 190. In a similar manner, if a trader purchases a stock for Rs. 400 and decides the stop loss at Rs. 430, then the stocks will automatically be sold off when the trigger price is reached.

This risk-mitigating mechanism in Cover Order trading restricts the risk for an investor because the maximum loss a trader can incur from a transaction is known in advance. This feature allows a trader to place a buy or sell order as per their risk appetite.

What is Cover Order in Intraday?

A Cover Order is a special intraday (same day) order that is accompanied by a compulsory Stop Loss Order. They are specifically used by intraday traders because as per brokers’ practice all Cover Orders must be squared-off before 3:10-3:20 p.m every day. If that doesn’t happen an automatic square-off mechanism is triggered which may or may not yield profitable results. This is the primary reason why they are suitable only for intraday traders.

Which is better Cover Order or Bracket Order?

As per professional traders, a Bracket Order is a better option as compared to a Cover Order for
trading for the following reason:

Bracket Orders allow 3 orders to be placed from 1 screen – Entry, Target and
Stop Loss order.

While Cover Orders allow only 2 – Entry and Stop Loss Order. You need the exit the order on your own or it is squared off by the brokers near the end of the trading session.

About the author

Rohit Malik

A yogi who like Finance and Technology. I have been in Indian Stock market for over 12 years now as financial analyst, portfolio manager, trader. Now, I focus on Yoga, Financial Education & Long term investing. 

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