Published : March 5, 2019
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.
In the following ways, we can execute a cover order –
Thus, to summarize, the following steps involve while placing cover orders –
The following two hypothetical examples explain the working of cover orders. I am explaining with the help of an index future and a stock.
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 –
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%.
Through following steps you can place a cover order with your day trading –
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.
Following are the advantages of cover orders –
The following are the disadvantages that cover order carries –
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 –
Discover in details about BRACKET ORDERS in our exclusive blog on the same.
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.
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.
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.
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