Beginners Guide - What is a Stop Loss Order - Various Types (Market, Limit & Trailing Stop Loss) in NEW TO TRADING & INVESTMENTS? - Lets discuss what is a stop loss order and how to use it efficiently and to safe-guard profits. Before we ...
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What is a Stop Loss Order - Various Types (Market, Limit & Trailing Stop Loss)

  1. What is a Stop Loss Order - Various Types (Market, Limit & Trailing Stop Loss)

    Lets discuss what is a stop loss order and how to use it efficiently and to safe-guard profits. Before we discuss about that, lets see the various types of stop loss orders and how to place a stop loss order.

    Acronyms to keep in Mind
    • SL (Stop Loss)
    • SL-M (Stop Loss Market order)
    • SL-L (Stop Loss Limit order)

    Stop Loss Market Order
    SL-M is the most popularly used stop loss order today. Lets take an example to explain better.
    • Lets say i bought a stock or options contract at a price of 110 (25 quantity), based on a solid analysis, with an expected target of 125
    • After a while, it moves up to 125 as expected.
    • Now, you can choose to exit or place a sell order at 125. (Or) If you believe it can go up further, you can place a stop loss market order with "trigger price" at 120.
    • If the LTP (Last Traded Price) drops below 120, it will change in to a market order. Assuming its a highly liquid, it may execute at say 119.80 ensuring that you end up in profits
    • If the stock moves up to 150, without dropping below 120, you will still be holding it, ensuring higher profits

    Below is a snapshot of Stop Loss Market order



    Stop Loss Limit Order
    SL-L (Stop Loss Limit order) is very similar to SL-M (Stop Loss Market order). It will specify a downside range where it can sell off your position.

    Lets take the same example. I bought at 110. It moves to 125. Now, will place a SL-L order, with "trigger price" at 120 and "price" at 117, as shown below in the snapshot order.



    In low volume options contract, if the LTP drops below 120, the next buyer may be only at 110. So if you place a SL-M (Market) order with trigger at 120, it will sell off immediately to the buyer at 110.

    But, if you use a SL-L (Limit) order, once LTP drops below 120, it will place a limit order to sell off in the range 117 to 120 ...

    However the disadvantage with SL-L order is that, if there is no buyer, it can potentially drop to even 90, without getting executed, putting you in losses.

    Key Points to Note:
    • Use a SL-M (Market) order in high liquid stocks or contracts
    • Use SL-L (Limit) order in low liquid stocks or contracts. But keep close watch
    • Always avoid trading in low volume or low liquid stocks (Always Dangerous)

    Trailing Stop Loss Order
    A trailing stop loss is a mechanism, where we manually modify and increase the stop loss of an existing stop loss order.

    For example, when the stock price moves to 140, we can modify existing stop loss order at 120 to 135.

    If stock price moves to 150, change the stop loss order to 145.

    How to Efficiently use a Stop Loss Order
    A smart trader, will need to analyse and understand the behavior of stock market first. RSI, Bollinger Bands are pretty useful indicators, which can help you decide. Next, is frame your strategy to minimize losses in-case, things go the other way.

    A smart trader will mostly not use the stop loss, immediately after entering a position. That will increase the possibility of the stop loss order being executed and ending up in losses. Once, the position enters expected profits, based on technical indicators, he will put in the stop loss order to safe-guard the profitable situation.

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  2. Thanks Mani,

    In SL-M orders, is is mandatory to set a range. What will happen if I set 120 as trigger price and 120 as Limit Price also. Will I miss the order being executed if the price falls below 120.

  3. Quote Originally Posted by AastroGuru View Post
    Thanks Mani,

    In SL-M orders, is is mandatory to set a range. What will happen if I set 120 as trigger price and 120 as Limit Price also. Will I miss the order being executed if the price falls below 120.
    In SL-M , you should mention only trigger price ... I don't think limit price will be considered

  4. Sorry, That was a typo, What I meant is SL-L stop loss limit order.

  5. Quote Originally Posted by AastroGuru View Post
    Sorry, That was a typo, What I meant is SL-L stop loss limit order.
    yes, in SL-L , you have to mention both trigger and limit price ... Giving Trigger and limit price too close may not execute order at times ...







  6. oh ok. thanks.
    Today, I checked it out. Stop Loss order.
    Order execution is happening after crossing the trigger price value.
    So it is always safe to put a range in Stop Loss - Limit order.

    StopLoss market orders are better than limit orders i guess. Thank you.

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