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10 FAQs – Cover orders in stock, commodity and currency market of India

Published : March 5, 2019

10 FAQs - Cover orders in stock, commodity and currency market of India

1. What are cover orders?

Cover orders are an intraday order. It is in use by traders across the world in stocks, commodities as well as currency day trading. Technically, any day trading order with a compulsory stop loss order is a cover order. Now, you place or fix stop loss order with your broker. You do this to sell any security at the point where it appears to be the final exit price.

We know that while buying or selling a security, an order can be a limit or market order. Further, when you accompany any such orders with a mandatory stop loss order, it becomes cover-order. It is a limit to a certain or specific range of prices. Significantly, once you fix your stop loss order, you cannot cancel it. Only you can modify it, within a time limit.

With cover order in place, your risk automatically reduces due to the placement of stop-loss order. Simultaneously, the margin requirement also reduces as there is a reduction in the risks.

In short, cover order is an exceptional type of order. This is the way through which you as a trader can take an intraday position. The advantages are the extra exposure along with protection by a shield called stop-loss order.

2. How you can execute cover orders?

In the following ways, we can execute a cover order –

  1. The cover order is primarily a two-legged order. This means the trader has to place a buy or sell order with an essential stop loss order in the opposite direction.
  2. The very first entry made into this order is a market order.
  3. The relative stop loss order sits in the order book as a stop loss trigger pending order. Here, once the trigger price hits the stop loss limit price, it gets triggered as a market order.
  4. The trigger price range is fixed on a daily basis. You need to fix stop loss order within the specified range. For example, any stock trading at INR 900 and the specific stop loss range is 10%. Then, in this case, you can specify the stop loss order between the range of INR 810 to 990 as the trigger price.
  5. After the first leg of your cover order gets executed, you cannot cancel your cover order. You can only modify the stop loss order within the stipulated price range. The recalculation of margin is done, once the order is modified.
  6. Generally your stockbroker RMS square-off all your cover orders at 3:20 pm in case of cash and future of equity market, and 11:30’11:55 pm for MCX commodities open trades.

3. Explain the steps involved while placing cover orders with examples?

Thus, to summarize, the following steps involve while placing cover orders –

  • First, the day trader requires to add the script in the bidding portal
  • Then, the selection of buying cover order and selling cover order is done.
  • Afterwards, the trader sees the execution of his/her buy or sell order.
  • The stop loss is defined as per the predefined stop loss range.
  • Once the order is placed, the trader sees the complete market order and the pending stop loss in his order book.
  • Thereafter, cancellation is not permitted in the cover order.
  • The exit of cover order position places the market order in opposite direction for the first leg.

The following two hypothetical examples explain the working of cover orders. I am explaining with the help of an index future and a stock.

Illustration 1 – Nifty futures cover orders

Suppose a trader X needs to place a buy cover order on Nifty future. Next, assume that the LTP of the Nifty future is 10600. Therefore, our trader X can place a stop loss order in the range of say, up to, 5 % below 10600 i.e. at maximum 10070. Further, the margin calculation for this buy cover order will be the higher of –

  • The percentage price difference between Leg 2 stop loss order and Leg 1 last traded price * 1.5
  • Minimum percentage margin of the traded value

Illustration 2 – Equity cover orders

Next, suppose our same trader X plans to buy a cover order now on Infy with LTP of 730. He can place his stop-loss order in a range of 5% downside. Currently, the applied minimum margins for different stop loss price is 5%.

4. How to place cover orders?

Through following steps you can place a cover order with your day trading –

  1. The trading system park two orders simultaneously. One is a market order and the other is stop-loss order.
  2. This only gets a trigger at the fixed stop loss trigger price. The trigger price is the price at which the exchange servers execute buy or sell order.
  3. Once the trigger price gets a hit, the stop loss order gets executed as a market order.
  4. After the trigger of stop-loss order, you will need to remove your market order. Else, if prices move in that direction it will trigger and create a fresh position.

Let us understand this with the help of an example. Suppose a trader is willing to buy position in Tata Steel. It is trading at INR 500 and is the default market rate. Assume the stop-loss range is 10%. So, the cover order will be placed together, with a maximum trigger price of INR 450 and a maximum limit price of INR 550.

Once the cover order is placed, the first leg is been placed, any further cancellation is not allowed. He can only exit the current one-sided position. Hence, in cover order, the trader needs to hold funds through hold or release before placing the order.

5. What are the advantages of cover orders?

 Following are the advantages of cover orders

  • It helps traders minimize downward risks and provides control over risk management.
  • It is a disciplined manner of trading
  • You get margin benefits as a core advantage.
  • The control over downside risk does not force any limits on returns.

6. What are the disadvantages of the cover orders?

The following are the disadvantages that cover order carries –

  • Cover orders do not allow any exit after the order is placed.
  • The cancellation of order is not accepted. You should close your position once entering into trading.
  • You need to be logged in your trading account when the execution of the target or stop loss is done.

7. What is the difference between cover orders and bracket orders?

Although there is not much difference between cover orders and bracket orders. Bracket orders are an extension of cover orders. Both are an intraday product for equity, F&O, currency, and commodity. Here are few comparisons between cover orders and bracket orders

  • In cover orders, margin requirement varies on the stop-loss price. Whereas in bracket orders as soon as a target or stop loss gets executed, the other one gets automatically cancelled. Hence, here also margin requirement also varies based on stop price, but in another way.
  • In the case of cover orders, an additional leg of a target attracts an additional margin. Whereas, in case of bracket orders, even after placement of three orders, the margin applicable is similar to cover order.
  • Cover orders do not have a target order with it whereas bracket orders have.
  • In cover orders, target orders are meant to be entered separately. Also, the auto- cancellation of one leg of the order once gets executed has an absence of this feature. Whereas, in bracket orders, it is an ability to add target orders in the same order.

 Discover in details about BRACKET ORDERS in our exclusive blog on the same.

“10 FAQs – Bracket orders in stock, commodity and currency market of India”

8. How to exit a cover orders?

A cover order is a market order and needs a mandatory stop-loss. One thing to note is that it does not carry a target order. You place a cover order at a market price of the script. Along with it, you need to place a stop loss margin order. This generally stays open in your order book.

Now, suppose, you wish to exit from your position before the market closure. In this case, first, you need to exit your open stop-loss order from your order book. At the same time another market order, which is basically an opposite kind of your position is transmitted to the exchange. Thus, next to it, your cover order gets square-off.

You must also note that you cannot square-off your cover order directly without out closing your stop loss order. This is so because the stop-loss order will remain in the system that might get the trigger and lead to open another position.

9. How to modify the cover orders?

You can modify your initial order only if the trade has not been executed. Further, the stop loss and target order can be modified any time before the position is squared off.

10. What are the margin requirements for cover orders?

In cover order, due to compulsory stop loss, the losses are automatically covered. The margins are basically the difference between the initial order and stop loss order multiplied by the quantity. These outcomes are the subject to minimum margin. As compared to simple orders, cover order requires lesser margins. This is because losses are already covered.

Besides bracket orders and cover orders, there are various other types of orders as well. Depending upon the market situations, these orders a trader places Read our exclusive blog on various types of MARKET ORDERS for traders in India.

“Different types of Indian stock market orders you should know”

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