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In the fast-paced world of intraday trading, managing risk is just as important as spotting opportunities. A commonly used tool for risk-managed trading is the cover order — a type of order that pairs your main order with a mandatory stop-loss. Brokers may offer reduced margin requirements for cover orders, subject to SEBI’s minimum intraday margin rules, making them popular among traders who want higher leverage without compromising on safety.
Understanding how cover orders function, their applicable contexts, and inherent limitations provides insight into trading discipline, risk management, and execution control.
Here’s what makes cover orders unique in trading systems:
A cover order is a two-legged intraday order where you place a buy/sell market or limit order, along with a mandatory stop-loss in the same instruction. The stop-loss cannot be removed, ensuring that any adverse price movement triggers an automatic exit.
This structure is intended to limit downside risk. Since the stop-loss is compulsory, brokers typically align margin rules with exchange requirements, positioning cover orders as intraday tools for disciplined risk control and efficient capital allocation.
Cover orders vary by direction and execution type:
Buy Cover Order: You buy a stock at market/limit price and set a stop-loss below the entry price to protect against downside.
Sell Cover Order: You sell a stock (short sell) and place a stop-loss above the sell price to protect against upside losses.
These orders are usually intraday-only, which means all positions must be squared off by the end of the trading session.
Cover orders are designed to provide certain advantages, especially for intraday traders looking for speed, control, and risk management:
Predefined Risk Control: Mandatory stop-loss ensures risk is capped upfront, reducing the chances of large losses.
Efficient Capital Use: Cover orders may allow lower margin use due to built-in stop-loss requirements.
Faster Execution: Since both legs (entry and stop-loss) are placed together, order processing is quicker and more efficient.
Emotional Discipline: Automated stop-loss reduces impulsive decision-making and prevents panic during volatile moves.
Time Efficiency: Once placed, the cover order needs minimal monitoring, freeing traders from manual supervision.
Broker Preference: Some platforms position cover orders as a risk-control feature.
Despite their efficiency, cover orders come with limitations and certain trading risks that must be considered:
Mandatory Stop-Loss: Traders have no flexibility to skip or delay stop-loss placement, which might not suit all strategies.
No Trailing Stop: Static stop-loss levels mean traders miss the benefit of adjusting risk levels as price moves in their favor.
Intraday Only: Most brokers restrict cover orders to intraday positions—overnight holding is not permitted.
Slippage Risk: In fast markets, stop-loss orders may get executed at worse-than-expected prices, impacting the final outcome.
Overtrading Potential: The ease and leverage may tempt traders to enter positions too frequently, increasing exposure.
Platform Restrictions: Not all brokers offer cover orders across all asset classes or instruments.
When evaluating cover orders, the following points are often noted:
Stop-loss placement typically follows technical levels rather than arbitrary figures.
Very tight stop-loss levels may be triggered quickly in volatile conditions.
Execution speed can vary, particularly during high-volatility market hours.
Leverage in cover orders is governed by margin rules; excessive use may increase exposure.
Broker-specific rules differ — margins, eligible stocks, and square-off timings are determined at the platform level.
Cover orders are a practical and efficient tool for managing intraday risk. By enforcing a mandatory stop-loss, they instil trading discipline, limit downside, and offer the benefit of higher leverage with reduced margins. However, traders should understand the rules and limitations before deploying them.
When used, cover orders are designed to improve trade safety and execution efficiency, especially in volatile markets.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
For example, a trader places a buy order at ₹2,500 with a stop-loss at ₹2,475, defining a ₹25 risk. If the price reaches stop-loss, the position is automatically squared off. (Illustrative only)
Since cover orders are intraday-only, they will be auto squared off at end-of-day if not exited manually. Traders can also exit the position before EOD via the trading platform.
Yes, cover orders are restricted to intraday trading. Positions must be closed within the same trading session.
No, the stop-loss leg in a cover order cannot be removed. However, some brokers may allow modifying the stop-loss price within allowed limits.
Margins vary by broker and volatility of the stock, but they are significantly lower compared to regular intraday or delivery trades due to the protective stop-loss.
If the stop-loss doesn’t trigger, the cover order will be forcefully squared off by the broker during the closing minutes of the session.
Most brokers restrict cover orders to the equity and F&O segments. Availability for commodities or currency segments may vary based on broker policies.
Bracket orders include three legs — entry, stop-loss, and target. Cover orders include only entry and stop-loss. Bracket orders allow predefined exits; cover orders offer simplified structure.
Yes. Cover orders can be placed by any eligible intraday participant. However, proper understanding of stop-loss mechanics, leverage, and broker-specific requirements is important.
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Posted on 19 Dec
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