Understanding and Exiting a Cover Order on Zerodha
Introduction to Cover Orders
Cover orders, also known as covered orders, play a crucial role in prudent risk management in the Indian stock market. A cover order is a type of order where the trader places either a market order or a limit order with a compulsory stop loss order. This ensures that the trade is exited at a predefined price if the market moves unfavorably. However, it's important to note that cover orders are not allowed on the Bombay Stock Exchange (BSE) and across the Futures and Options (FO) segments.
What is a Cover Order?
A cover order is essentially a protective order that guarantees the trader a predetermined exit price, effectively setting a ceiling on the potential loss. When you place a cover order, you are essentially setting a limit or market order along with a stop loss that cannot be canceled once it is placed. This ensures that the trade is automatically closed if the market moves against your position.
Why Use a Cover Order?
Using a cover order can be advantageous in several scenarios. Firstly, it helps in managing risks by limiting potential losses. Secondly, it provides a structured approach to handling market volatility. Lastly, it ensures compliance with regulatory requirements, reducing the chances of orders being rejected or not executed as planned.
Placing a Cover Order on Zerodha
To place a cover order on Zerodha, follow these steps:
Login to your Zerodha trading platform. Navigate to the stock or instrument you wish to trade. Select the 'Cover Order' option available in the order types section. Enter the details of your cover order, including the price and quantity. Set the stop loss price to ensure your exit point is clearly defined. Review your order and place it within the platform.Exiting a Cover Order
Exiting a cover order is a straightforward process. Here’s how you can do it:
1. Market Price Reaches Stop Loss Trigger Point
If the market price reaches the stop loss trigger point, the cover order will automatically close your position. This means that your exit price is determined by the market and not by manually canceling or amending the order.
2. Manually Canceling the Cover Order
In certain scenarios, you might want to exit your position before the stop loss is triggered. To do this, you can manually cancel the cover order:
Log in to your Zerodha account. Navigate to the order book section. Locate the cover order you wish to cancel. Click on the 'Cancel' button for the specific order.3. Partial or Full Exit
You can choose to partially or fully exit your cover order. If you only want to exit a portion of your position, follow the manual cancellation steps for the relevant quantity.
Important Considerations
When using a cover order, there are a few key considerations to keep in mind:
Market Liquidity: Ensure that the market is liquid to avoid slippage during execution. Stop Loss Placement: Place your stop loss at a logical level, neither too close nor too far from your entry price. Review and Adjust: Regularly review your cover order and adjust it as market conditions change. No Use on BSE and FO Segments: Remember that cover orders are not allowed on BSE and across FO segments.Conclusion
In summary, cover orders on Zerodha are an effective tool for risk management in the Indian stock market. By understanding the mechanics of cover orders and how to place and exit them, traders can protect their capital and manage their investments more effectively.
FAQ
What are the advantages of using a cover order on Zerodha?The advantages include automatic exit at a predetermined price, protection against potential losses, and regulatory compliance. Cover orders help in managing risks and ensure that trades are executed as planned.
Can I manually cancel a cover order?Yes, you can manually cancel a cover order. Navigate to your order book and click the 'Cancel' button to remove the order from your active positions.
Are cover orders allowed on BSE and BSE derivatives segment (FO)?No, cover orders are not allowed on BSE or across the BSE derivatives segment (FO). They are primarily used for trading on the National Stock Exchange (NSE).