Financial market and trading performance require an appreciation of risk management. Cover Orders have become more popular for traders to mitigate risk and successfully negotiate the often chaotic intraday trading environment. This article explores the topic of Cover Orders, delving into their definition, the distinction between Buy and Sell Cover Orders, and the various uses for each. 

Learning how cover orders work and the advantages they provide can help traders make the most of profitable market opportunities while mitigating risk and higher leverage. Risk management resources greatly bolster traders’ trust in the market. This article will examine the cover order, a stop, and how it can be used in online intraday trading. 

Cover Order — what is it?

In intraday trading, a cover order combines a Market/Limit Order with a Stop-loss Order. As the name implies, it protects a trader’s funds while actively trading futures, options, stocks, and other financial instruments in the stock exchanges throughout a single trading day. 

• A stop-loss order price must be entered after a cover order is placed, regardless of whether the order was placed at a limit or market price. 

• A cover order’s built-in risk mechanism allows you to cut losses in half if the price suddenly reverses. Once the Stop-Loss price is reached, your intraday position will be closed.  
• Since risk management is built into the covered order, you and your broker can use greater leverage. That’s why day traders enjoy a 5x margin. 
• In the stock market, the term of a cover order is one trading day, or from 9:15 a.m. to 3:30 p.m.

Cover Orders Versus Regular MIS Orders

The Order Window frequently displays MIS or Margin Intraday Square Off orders for intraday trading. 

• Trading positions that use ordinary MIS orders are susceptible to whipsaw since the trader intends to purchase or sell the security at the Market Price without a Stop-Loss.
• However, cover orders already incorporate a risk management mechanism as a Stop-Loss so they can be placed confidently. 
• In addition, the trader must manually square off a standard MIS order to avoid auto square-off fees. 
• Those who like to be able to go away from their computers during market hours can benefit from placing cover orders, while those who wish to keep a close eye on their holdings should stick to regular MIS orders. 

Types of Cover Orders 

Two kinds of cover orders help you, the trader, control your risk exposure.

1. Long Cover Order 

A long cover order is a “buy” order with a Stop Loss placed at the Market/Limit price. You can limit your exposure to loss by setting a Stop Loss order to close your position if the price drops below a certain threshold below your purchase price.  

2. Short Cover Order

The stop loss order would be set at a price greater than the selling price in the case of a short cover order, a “sell” order. Short cover orders are used when taking a temporary position and are another tool for risk management. As the selling price increases, the Stop Loss will be activated.

Cover Order’s Advantages

Let’s say you place a buy order, but the market abruptly reverses course, costing you a lot of money. This whipsaw has the potential to completely wipe out your trading account, which is counterproductive to your goals. As a trader, your ultimate goal should be to increase your profit margin. Therefore, having a cover order in place is essential during intraday trading. 

The fundamental purpose of a cover order is to help you better manage risk and exert more influence over your trades. Having risk management in place automatically aids in maintaining discipline. By doing so, you may trade more rationally and effectively, regardless of the market’s direction, rather than being at the mercy of your emotions.

Remember that you’ll be the one to specify your maximum loss by establishing the stop loss. You’ll have access to greater leverage, which can be increased through pledging shares. As a result, the advantages of using a cover order in trading are as follows:

• Facilitates risk management.
• Devoid of feeling
• More of a foothold 

The Drawbacks of Cover Order

Intraday trading is tailor-made for cover orders. That’s why the Stop-Loss only works for a single trading day. 

• In addition, if you don’t have a firm grasp of the market, placing too much stock in Stop-Loss orders may cause you to enter or exit poor positions with alarming regularity. When market volatility is high, the situation may become critical.  

• Rapid price fluctuations in turbulent markets might cause Stop-Loss orders to be executed at unfavourable prices. This “slippage” might lead to unanticipated financial losses.

• However, brokers may not always permit cover orders for all market segments or exchanges, which are only available for a subset of financial instruments. 

• Because of this restriction, cover orders might not be available for some assets or trading venues. 

• Unless you have Market Price Protection, the Stop-Loss price may be pushed to unfavourable levels even if you issue a cover order.  

How to Place a Cover Order?

A cover order will appear on the order screen alongside other order types if your broker supports them. Cover orders can be placed for equities, indices, and currency futures.

Here’s how to use the apps or website to place a cover order:

1. Decide on stock to monitor.

2. Select the Buy or Sell option.

3. Click the “Trading” button. 

4. Click the “Cover” option.

5. Pick a market or limit order.

6. Set a Stop Loss Order

The process of ordering a cover is easy. The trick is predetermining your entry and exit points and defining your stop loss levels to the letter. Remember that cover orders can only be placed in India when the stock, commodities, or FX markets are open for trade. 

Avoiding Common Cover Order Mistakes

The cover order process is straightforward, but you should always use caution. Traders frequently make the following blunders while submitting a cover order. 

1. Ignoring the Stop-Loss Calculation

More often than not, a Stop-Loss is chosen at random. Stop Loss levels for cover orders should be determined after carefully considering both percentage and absolute values. 

2. Making the Incorrect Type of Order 

An inexperienced intraday trader can make the mistake of placing a conventional MIS order instead of a cover order. Indeed, even seasoned traders may err in this way amid volatile market conditions. Because of this, choosing the correct order type requires extra caution. 

3. Failure to Check Cover Orders

Even though a Stop-Loss is in place for cover orders, you still need to keep an eye on your position to keep up with the intraday market. Stop-Loss orders may be executed unexpectedly due to volatility or gaps.  

Cover Order vs Bracket Order

Intraday traders utilize cover and bracket orders as risk management techniques. While there are certain commonalities between the two orders, there are also key differences. The main goal is to reduce the risk of losing money and give you more say over your trades. 

• If the market moves against your position and the Stop-loss price is reached, the trade is automatically squared off once the cover order is executed.
• Conversely, a bracket order is more all-encompassing because it incorporates profit and stop-loss objectives. It “brackets” your deal such that a certain profit or loss is guaranteed. 
• When you make a bracket order, you specify the Share price at which you want to buy or sell and at which you want to stop losing money.  

Difference Between Cover and Bracket Order

• Cover orders and bracket orders differ primarily in their risk-reward ratio. 
• In contrast to bracket orders, which assist in limiting losses and set profit targets, cover orders focus entirely on restricted failures.
• Because of the high-stakes nature of intraday trading, cover orders are best suited for traders whose primary concern is risk management and limiting losses. 
• However, traders interested in maximizing both profits and minimizing losses may find bracket orders to be a useful tool. 

Conclusion

Even though the cover order meaning is obvious, you should utilize it cautiously. Successful trading comes down to two things: keeping your money safe and keeping your emotions in check. Including a thorough risk management system in your trading plan is one method to control your feelings. Cover orders facilitate effective risk-reward management. 

FAQs

1. What does the trading term “Cover Order” mean?

To prevent losses during intraday trading, a Cover Order combines a market order to buy or sell a security with a stop-loss order.

2. What are the various Cover Orders that can be placed?

You can use a Buy Cover Order to buy at a price lower than the current market price and a Sell Cover Order to sell at a higher price than the current market price.

3. To what end do Cover Orders assist dealers?

Intraday traders might benefit from Cover Orders in volatile markets because of their reduced exposure to loss, faster entry and exit times, and the possibility of lower margin requirements.

4. When comparing the cash market with F&O, what are the key distinctions?

Stocks purchased in the cash market can be held indefinitely. Futures contracts have a maximum three-month settlement period, after which they must be cancelled. 

5. When Should You Use Cover Orders?

Cover orders are highly advised in volatile markets, where sudden and unexpected price changes frequently occur. Intraday traders who value disciplined trading techniques and effective risk management will find these indicators useful.