What Is a Bracket Order and How Does One-Cancels-Other Work?

What happens to the stop when the target fills? In a bracket order, it is canceled automatically. That link between the two exits is the part called one-cancels-other, or OCO, and it is the reason brackets exist.

A bracket has three legs. There is the entry, usually a limit order. Attached to it are two exits that wait until the entry fills: a sell limit above the price to take profit, and a sell stop below it to cap the loss, reversed for a short. Once the entry fills, both exits go live together. Whichever one executes first cancels the other.

Why traders use them

The exit plan exists before the trade does.

That sounds minor. It removes the most common gap in a discretionary trade, the minutes or hours between getting filled and getting around to placing a stop, and it also removes the temptation to rethink the target while the position is open and the price is moving, which is when judgment tends to be worst. With the bracket in place, an alert on the stock becomes a reason to check whether the plan still holds, the approach argued in treating a price alert as a prompt to check your plan.

A bracket knows two prices and nothing else. If the reason for the trade falls apart halfway between the stop and the target, say because a news item lands that changes the picture for the company, the bracket will keep waiting for one of its two levels, and closing the position early means canceling the group and exiting yourself. Some traders also add a time rule. Out by the close, for instance.

A worked bracket in R

R is the amount you stand to lose if the stop is hit. Measuring the target in multiples of R makes different trades comparable.

The stop leg is normally a stop market order, so the 300 is planned risk. Slippage or a gap can make it larger. The trade risk worksheet runs the same sums for your own entry, stop and size.

Pitfalls

Partial fills. Say only 200 of the 500 shares fill at 25.00. Some brokers size both exits to the 200 you actually hold and adjust them as more fills arrive. Others behave differently, and a few may leave exits sized to the full order, so check how yours handles it before the first real trade, and see what happens when an order partially fills for the general mechanics.

Modifying one leg. Moving the stop up is a normal thing to want. On some platforms that edit keeps the OCO link intact. On others it can cancel and replace the whole group, or break the link so the two exits are no longer tied, which is how a trader ends up with a filled target and a stop still working on a position that no longer exists. Read the platform’s rules on editing brackets.

Time in force. The entry and the exits can carry different time in force settings. A day entry with GTC exits is common. A day stop leg that expires at the close leaves the position with only a target overnight.

Extended hours. Many platforms accept brackets only for the regular session, or let the limit legs work in extended hours while the stop leg does not. Brokers vary.

Gaps. A bracket is still made of ordinary orders. A gap below the stop fills the stop leg at the open, wherever that is.

Some platforms let the stop leg be a trailing stop, which keeps the OCO link while the protective price follows the stock upward.