Trading in the stock market involves balancing potential returns with risk management. One way traders optimize their strategy is through Cover Orders (CO), a specialized order type that combines high leverage with built-in risk control. This article explains how cover orders work, their advantages, and key considerations when using them.
What is a Cover Order?
A Cover Order (CO) is a two-legged order that includes:
1. Market or Limit Order – The primary order for buying or selling an asset.
2. Compulsory Stop-Loss Order – A predefined stop-loss that limits potential losses by automatically exiting the position when the price moves unfavorably.
Since the stop-loss is mandatory, brokers typically offer higher leverage on cover orders compared to regular trades.
How Cover Orders Work?
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A trader places a buy or sell order with an attached stop-loss.
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The stop-loss ensures that if the market moves against the trade, losses are contained.
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Due to the risk control mechanism, brokers provide better margin benefits, allowing traders to take larger positions with lower capital.
Advantages of Using Cover Orders
Higher Leverage – Traders can enter larger positions with lower capital requirements.
Built-in Risk Management – The mandatory stop-loss order limits downside risk automatically.
Faster Execution – Since the order structure is predefined, execution is quick and automated.
Reduced Emotional Trading – Stop-loss enforcement prevents panic-based decision-making.
Key Considerations Before Using Cover Orders
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Stop-Loss Cannot Be Removed – The predefined stop-loss cannot be modified once placed.
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Available Only for Intraday Trades – Cover orders are typically limited to same-day trading.
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Market Volatility Impact – A sudden price movement may trigger the stop-loss, resulting in early exit.
Conclusion
Cover orders provide an efficient way to trade with high leverage while maintaining risk control. However, traders should carefully evaluate market conditions and stop-loss levels to maximize their benefits. To estimate margin requirements for cover orders, use this Cover Order Calculator before placing a trade.
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