What is Cover Order in Share Market?

Cover orders (COs) are crucial in today's trading world for managing risks and optimizing returns. They provide a robust tool for traders to take their trading to the next level, whether they're seasoned or just starting. This article will detail the benefits, function, and best practices for using COs efficiently, helping traders take their trading to the next level.

What is Cover Order (CO)?

A cover order means a special kind of order in which the trader simultaneously submits two orders. The trader would be able to make two orders at the same time by using one order to buy or sell the stock and another order to put a stop loss. By doing this, the trader limits the possible loss on a position, protecting themselves. Stated otherwise, a cover order consists of the primary leg and the secondary leg, which are two orders or "legs." The primary position, or buy/sell, is the major leg. A stop loss order is used in the secondary leg to automatically square off the position and minimize losses.

Only orders placed during the same day can use the cover order feature. After selecting the order, you will be prompted to enter the limit price and trigger price before completing the order placement. Since intraday traders are the main users of this technique, it is important to remember that all cover orders need to be squared off by 3:10 pm. every day.

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Example of Cover Order

The program will sell the stock when the price hits ₹ 210 or above (better) if your primary leg is a sell order. You may create a limit order of ₹ 210 (often a better/higher price than the market price). Next, you might place a stop-loss order at ₹ 212, which is the price at which the stock will be repurchased to minimize losses, as your secondary leg. In other words, your maximum gain will be ₹ 210 (if the stock price drops to ₹ 0), but your maximum loss would be restricted at ₹ 2.

You can create a limit order of ₹ 190 if your primary leg is a purchase order. A stop-loss order placed at ₹ 188, the price at which the stock would be liquidated to limit losses, might then be your secondary leg. Your maximum gain will be infinite, but your possible losses will be restricted at ₹ 2.

How does Cover Order work?

A Market Order or a Limit Order may be used to place a Cover Order.

• When an investor places a market order, their goal is to trade an asset at the best market price that is accessible at that particular moment.
• A trader using a limit order will only open a position if the target price level is reached or above. Put differently, they will only buy an asset at the agreed-upon price or below and sell it at the desired price or above.

Along with this order for the purchase or sale of an asset, a Stop-Loss Order is also placed. With the latter capability, a transaction will be reversed if the asset's price hits a preset limit. For example, if a stock is bought for Rs. 200 and the stop-loss price is fixed at Rs. 180, shares will be sold immediately if the price of the stock reaches Rs. 180. With Cover Order trading, this risk-reduction technique limits the investor's exposure to risk. It is also possible to change this stop-loss order, but it cannot be revoked.

Advantages of Cover Order

The two primary benefits that Cover Order offers set it apart from other Order options.

Efficient Risk Management: The primary benefit of using cover orders in your trading plan is their exceptional ability to control risk. When you simultaneously initiate the stop-loss order and the main order, you fortify your defense against future losses. By taking this technique, you may protect your trading cash by limiting your exposure to abrupt market downturns.

Guarding Against Volatility: It's common knowledge that the stock market may be turbulent, with prices exhibiting erratic fluctuations in a little amount of time. Cover orders serve as a reliable protector in this situation, providing a cushion against the effects of sudden price swings. This protection is especially important when things are tumultuous because it keeps you strong when the market fluctuates.

Maintaining Trading Discipline: In the realm of trading, emotional decision-making frequently results in tragedy. Cover orders are essential for developing and preserving trading discipline. These methods reduce the temptation to hold onto failing positions in the hopes of a miracle reversal by automating the execution of stop-loss orders. This ultimately results in more informed judgments by instilling a disciplined and logical attitude to trading.

Effective Capital Utilisation: Cover orders are another factor in effective capital utilisation. You have greater control over the possible loss amount when you establish predetermined stop-loss settings. With this control, you may maximize your total trading potential by intelligently allocating your trading money over several transactions while maintaining loss containment for each trade.

Disadvantages of Cover Order

Following are the disadvantages of Cover Order:

Price Volatility Influences: The effectiveness of cover orders may occasionally be jeopardized under extremely erratic market circumstances. Severe price swings might cause stop-loss orders to be activated too soon, which can result in unanticipated sell-offs before the predicted price recovery really happens. This possible drawback emphasizes how crucial it is to comprehend market dynamics and adjust your stop-loss levels to take into consideration the inherent volatility of particular companies or market niches.

Slightly Higher Brokerage Costs: Although cover orders provide many advantages, it's vital to recognise that some brokerage companies may charge slightly more in brokerage costs when handling cover orders. The complexity of concurrently managing two related orders is the source of this additional expense. Therefore, before making cover orders a cornerstone of your trading strategy, it's wise to balance these additional expenses against the possible benefits.

What are the Different Types of Cover Orders?

Long Cover Order

A long cover order is one that a trader places when he or she intends to acquire equities during a trading session. Furthermore, this means that traders are buying equities in a bullish trend. This order is placed in conjunction with a stop-loss order at a price lower than the purchase price. 

Short Cover Order

A trader will put a short cover order if they wish to sell the equities. In this case, the stop-loss order will be set higher than the stock price. In contrast to the lengthy cover order, the short cover order is complete. 

Why do traders use cover orders?

Here are the following reasons why do traders prefers cover orders:

1. Risk management: One of cover orders' most important benefits is their capacity for efficient risk management. A stop-loss order combined with a main order allows traders to specify the maximum allowable loss up front. This helps safeguard their wealth in erratic markets and gives them a predetermined exit route.
2. Protection from unfavorable price fluctuations: Cover orders serve as a buffer against unforeseen and unfavorable price fluctuations. The stop-loss order limits possible losses if the market goes against the trader's position. For day traders and short-term traders who are unable to continuously watch the markets, this function is especially helpful.
3. Self-control and emotional caution: A trader's emotions can frequently impair their judgment, resulting in rash decisions and illogical deals. By automating the exit plan, cover orders assist traders in keeping emotional control and discipline. This obviates the necessity for continuous supervision and allows traders to adhere to their prearranged trading schedules.
4. Fast execution: In unstable markets, cover orders guarantee fast execution. The stop-loss order ensures that the deal is closed as near to the designated price level as feasible by being executed as a market order when it is triggered. In volatile markets where prices may shift in a matter of seconds, this quick execution can be quite important.

How to place a Cover Order?

The purpose of the stop-loss order is to limit potential losses on the trade if the market moves in the desired direction. Here are the steps to place a cover order on the BlinkX trading platform:

Step 1: Login to your BlinkX account and select the preferred stock you wish to trade.

Step 2: Click on the "Place Order" button.

Step 3: Select the "Cover Order" option from the order type dropdown menu in the order form.

Step 4: Enter the desired quantity and price for the buy or sell order.

Step 5: Set the stop loss trigger price to limit potential losses if the market moves against your desired direction.

Step 6: Review your order details and click the "Place Order" button to submit your cover order. 

How to Square Off Cover Order?

A square-off is the process of closing an open position in the market. Once a cover order is executed, it becomes an open position until the trade is squared off. Here are the steps to square off a cover order on the BlinkX trading platform:

Step 1: Login to your BlinkX account and navigate to the "Orders" tab.

Step 2: Locate the open cover order you wish to square off and click the "Square Off" button next to it.

Step 3: Review the order details and click the "Confirm" button to square off the trade.

Step 4: Once the square-off order is executed, you will receive a confirmation message. 

Conclusion 
In overall, traders looking to reduce risk and achieve better trading results must comprehend cover orders. Whether studying the benefits, drawbacks, or various kinds of cover orders, a thorough understanding of this trading instrument is essential. Additionally, traders' ability to properly traverse the markets is improved by learning how to place and square off cover orders. By incorporating cover orders into trading plans, traders may better control risk, safeguard money, and make well-informed decisions—all of which lead to a more disciplined and successful trading environment.