Bracket orders: Advanced support and resistance trading with custom orders

By Kraken Learn team
13 min
Oct 16, 2024
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Optimize your trading with bracket orders 📖

  • Bracket orders combine an entry, stop and take-profit into one order, allowing for automatic ‘set and forget’ execution of trading strategies. They can also be known as ‘Take Profit/Stop Loss’ (or TP/SL for short).

  • Bracket orders may make it easier for traders to employ consistent and disciplined risk management, as every trade has a clear plan.

  • They may be particularly useful for support and resistance traders, who often identify their invalidation and take-profit levels in advance.

The goal of a crypto trader is to identify when a digital asset may be trading at a discount or a premium. One way in which traders achieve this is via technical analysis, which involves using price charts to identify repeatable patterns

Support and resistance (S/R) - an established concept that is adopted by professional traders - is one such pattern.

If you've observed the cryptocurrency markets, you may have noticed that prices often struggle to break through certain levels. These levels, where buying or selling pressure intensifies, frequently mark potential reversals in the market.

Support is a price level where buyers perceive value, prompting them to place limit orders or execute market orders to prevent the price from falling further. This creates a "floor" in the market, often visible on charts as candlesticks with long lower wicks, indicating failed attempts by sellers to drive the price down.

On the flip side, resistance is a level where selling pressure outweighs buying interest. At this point, sellers believe the asset is overvalued and seek to liquidate their positions. This creates a "ceiling," often characterized by candlesticks with long upper wicks, where buyers repeatedly fail to push the price higher.

What are bracket orders? 🤔

Bracket orders are a powerful tool designed to manage risk and secure profits by combining three orders into one. This approach ensures that every aspect of a trade is accounted for from the moment of entry. 

The term "bracketing" refers to covering all potential outcomes of a trade. For example, when placing a buy order for a crypto asset, a bracket order includes both a stop-loss order below the entry price and a take-profit order above it. These orders are set with matching sizes to ensure the position is fully closed, regardless of which direction the market moves.

In the context of support and resistance (S/R) trading, bracket orders allow traders to set an entry point along with a stop-loss at the level where the trade would be invalidated, and a take-profit order to lock in gains if the trade goes as planned. 

This feature is particularly valuable for S/R traders, who often plan each component of their trade in advance, making bracket orders an ideal choice for executing a well-structured trading strategy.

For more information on take-profit, limit and market orders, check out our Kraken Learn Center guide, What are trade orders?

Understanding bracket orders 🧐

Every bracket order is made up of the following individual components, each of which can be entered into the order form when setting up the trade:

  1. An entry: can either be a limit or market order.

  2. A stop: typically placed where the original trade thesis is considered invalidated.

  3. A take-profit: placed at the trade target level.

NB: The stop and take-profit can usually be entered as prices or, as an offset percentage; the distance in price - expressed as a percentage - from the entry.

Once the entry order is filled, both the stop-loss and take-profit orders become active, automating the management of the entire trade. These orders follow a "one cancels the other" principle, ensuring that if one order is triggered, the other is automatically canceled.

Image of a line chart and a candlestick chart

How to trade support and resistance levels using bracket orders 🏆

Here are three ways a trader might look to trade support and resistance:

  1. Buying an area of known support.

  2. Selling an area of known resistance.

  3. Trading the retest of a support/resistance level that has recently been broken (an ‘S/R flip’).

In every setup described above, a trader must identify their entry, stop and take-profit ahead of time. 

To demonstrate how bracket orders add value to S/R traders, let's examine the sequence of events involved in putting on a trade, as well as the concept of risk and reward.

Bracket orders in action: A step-by-step practical guide

Here are three ways a trader might look to trade support and resistance:

  1. Buying an area of known support.

  2. Selling an area of known resistance.

  3. Trading the retest of a support/resistance level that has recently been broken (an ‘S/R flip’).

In every setup described above, a trader must identify their entry, stop and take-profit ahead of time. 

To demonstrate how bracket orders add value to S/R traders, let's examine the sequence of events involved in putting on a trade, as well as the concept of risk and reward.

Step 1: Signal - Every successful trading strategy starts with a signal that suggests a potential trade. For S/R traders, this signal could be either a price level being rejected multiple times or a price breaking through a key level, hinting at a possible entry when the price retests it. In our example, Solana (SOL) is trading at $115 after breaking out from a long consolidation. As the $100 price level previously acted as resistance on several occasions, it may act as support when retested from the other side for the first time. 

Step 2: Entry - Once you’ve identified a valid signal, the next step is to find the right level to enter the trade. Many S/R traders opt to use limit orders, as this strategy often involves waiting for price to revisit a level. As is the case with this example, in anticipation of the $100 level flipping to support, you decide to place a limit order a few ticks higher at $100.10, where a cluster of wicks from the former resistance suggests a strong entry point. Confident in your analysis, you place your bracket order at 20:00 UTC before leaving the desk. 

Step 3: Exits - Every trade needs clear exit points—one for when the trade goes wrong (stop-loss) and one for when it goes right (take-profit). For our Solana trade, you place the stop at $85 below another S/R level, where the trade thesis would likely be invalid. For the take-profit, you target $130, a former support level and the first trouble area on the daily chart. These levels provide a reward-to-risk ratio of just under 2:1. As you intend to risk 1% of your $10,000 account, you calculate that with a position size of 6.6 SOL, you stand to gain close to $200 if the trade is successful, versus a potential loss of $100 if it fails. 

Step 4: Management - After placing your bracket order, your stop-loss and take-profit orders go live the moment your entry order is executed. At 03:05 the following morning, Solana’s price wicks down to your limit order at $100.10, filling your position at full size. From this point on, the execution of the entire trade is automated. By 07:00, the market reaches your take-profit level, closing the trade at an average price of $129.90 while simultaneously canceling your stop-loss. When you check your account later, you find that the trade was executed successfully, with no action required on your part.

Risk, reward and risk-management

Bracket orders can be a valuable tool for traders, allowing them to easily manage risk while accurately calculating the risk-to-reward ratio of each trade.

Effective risk management is crucial to long-term success in trading and investing. But what exactly does good risk management entail? Here's a basic overview:

At its core, good risk management involves limiting the amount of capital you expose to risk on each trade. This disciplined approach helps you grow your account steadily and reduces the likelihood of significant losses, also known as "risk of ruin."

Risk of ruin refers to the possibility of depleting your trading account to the point where recovery is impossible. To avoid this, traders often adopt the practice of risking only a small percentage—typically 1-2%—of their capital on any single trade or across multiple trades.

By capping your risk in this way, you safeguard your account against large drawdowns, ensuring that your trading journey remains sustainable over the long term. 

If you're curious about the impact of managing risk on your trades, consider experimenting with tools that simulate how different levels of risk affect your overall trading performance.

Reward-to-risk ratio and R

Before putting on a trade, many traders know in advance:

  • Where they will enter, stop out and take-profit.

  • How much of their capital they want to risk.

  • Their intended gain from the trade, if it works.

With all the above information at their disposal, a trader can calculate the reward-to-risk ratio of any trade ahead of time. To explain, let’s imagine that you have $10,000 in your trading account, and you intend to buy 100 Chainlink (LINK) at the price of $10, with a stop at $9 and a take-profit at $12. Here are the potential outcomes, assuming the trader does not actively manage the trade and that there are no fees or slippage:

  1. The order does not get filled, and there is no loss or gain. 

  2. The order gets filled, but price reaches the stop: -$100

  3. The order gets filled and the price reaches the take-profit: +$200.

The reward-to-risk ratio of this trade would be 2:1 because the trader is risking 1 unit of risk ($100) to potentially gain two units of risk ($200). Expressed in terms of the offset percentage, the stop would be 10% below the entry and the take-profit 20% above the entry. 

Note that the reward-to-risk ratio is only an estimation; variables such as slippage can have an impact on the actual realized gains and losses. 

"R" simply refers to one unit of risk, or how much we ideally are prepared to lose on a trade. R is often standardized to be a fixed percentage per trade, and this is useful because it allows traders to measure their performance in a variety of ways. In the LINK example above, one R equated to 1% of risk, as the trader risked $100 of their $10,000 account. 

To learn more about R and its utility for traders, this article provides a good overview. 

black swan event crypto

The importance of position size 🎚️

Traders manage risk by adjusting their position size—the amount of cryptocurrency they buy or sell in each trade—according to their risk-management rules. For instance, if the trader in the earlier example decided to risk 5% of their account instead of 1%, they would increase their position size from 100 to 500 LINK.

This adjustment would raise the potential loss to $500 and the potential gain to $1,000. It's essential that position sizing aligns with the trader's maximum acceptable risk, as outlined in their risk-management strategy.

Why bracket orders are useful 🧑🏽‍💻

Given the above, it becomes clear why bracket orders are an invaluable tool for traders. By allowing you to set your entry, stop-loss, and take-profit levels simultaneously, bracket orders offer several key benefits:

  • Clear Risk and Reward: You have a precise understanding of your reward-to-risk ratio as well as exactly how much you stand to lose or gain—excluding potential slippage and fees—if the trade reaches your stop-loss or take-profit levels.

  • Hands-Off Execution: Once the trade is set, no further intervention is needed. The trade will either succeed or fail, and the entire process is automated.

NB: It's important to note that the exact amount you lose if your stop-loss is triggered cannot be guaranteed. Since stop-losses are executed as market orders, your average exit price will depend on the available liquidity in the order book at the time of execution, among other factors.

Bracket orders and mental capital

The concept of "mental capital" refers to a trader's ability to manage the psychological challenges inherent in trading. Several factors can significantly drain mental capital, including:

  • Extended periods of drawdown.

  • Repeatedly liquidating accounts.

  • Inconsistent adherence to a trading plan.

  • Lack of a trading plan altogether.

  • Poor discipline in risk management.

Bracket orders may help preserve mental capital by promoting consistency and discipline. 

When every trade has a clear entry, stop-loss, and take-profit level, and the position size is predetermined, it becomes easier to stick to a trading plan. This approach is crucial, especially considering that many traders struggle with letting losses run while cutting winners short. 

By ensuring that losses are capped and that winners, on average, exceed losers, traders are already positioning themselves ahead of many of their peers.

In summary, bracket orders can be an extremely useful tool for traders - particularly those interested in trading support and resistance - as they combine three orders into one, allowing for automatic execution of a trade from entry to exit. 

Perhaps the most valuable feature of bracket orders is that they encourage sound risk management, ensuring that every trade has a clear plan, which can be executed without intervention. By combining backtesting with a detailed trading journal, traders may be able to maximize the utility of bracket orders by identifying when they are most effective.

Image of a line chart and a candlestick chart

Get started with Kraken Pro

Now that you understand what bracket orders are and how they can enhance risk management, why not sign up for a free Kraken Pro account and start integrating this advanced tool into your trading strategy today!

Disclaimer

These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell, stake, or hold any cryptoasset or to engage in any specific trading strategy. Kraken makes no representation or warranty of any kind, express or implied, as to the accuracy, completeness, timeliness, suitability or validity of any such information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Kraken does not and will not work to increase or decrease the price of any particular cryptoasset it makes available. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your cryptoassets and you should seek independent advice on your taxation position. Geographic restrictions may apply