Stop-losses are the easiest and simplest way of protecting yourself from falling bottomlessly in a bad market situation. They can be applied on a bought or short sold instrument and can be modified at any point of time in a single day as they are day orders. We wrote this blog to help you understand stop-loss orders better. Read on to find out how it works.
What is a stop loss order?
A stop-loss is an order put to stop the loss on any particular order. Say a certain instrument is being traded at Rs. 100 and I place a buy order in expectations that it’ll rise. But if it falls, I am not ready to take a hit of more than 5Rs per quantity. Which means that if I sell it for less than 95 Rs, it’ll be a loss I am not ready to afford. In this case, a stop-loss order will be a sell order. Here we can put a stop-loss at 95 and the instrument will be automatically sold once the price reaches Rs. 95.
I see! So where do I use it?
Most intraday and short term trades happen based on a certain expected volatility in the market. We expect the share market to drift in a certain direction and place a bet on that change. But there could be cases where shifts happen really fast when you are least expecting them. Stop-losses are made so you could save yourself the pain of keeping track of and acting on a fast-changing market.
Stop loss order is the easiest way of not incurring loss in online trading
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Is it of the same nature in case of buying and selling an instrument?
No. Stop losses are of two categories in terms of what loss they are used to avoid. If you are selling an instrument, your stop loss order will be a buy order and if you are buying an instrument, your stop loss order will be a sell order.
Stop-losses are of two types in terms of execution. The limit order stop loss and the market order stop loss. Limit order stop losses have a trigger price and a selling price. The trigger price is where the stop loss order becomes active and the limit price is the price at which it’ll be sold once the market reaches that price. In the case of a market stop loss, there is only a trigger price, after which the stock is sold at the market price.
NEST represents these as SL (limit order stop loss) and SL-M (market order stop loss).
So I put a stop-loss and literally stop worrying right?
Not really! It depends on what type of stop-loss you’re putting, how close it is to your worst bearable loss and how badly the market is moving against you.
Let’s make it easier to understand. If you put a limit order stop loss and the market is falling down or going up (any direction against your favor) really fast, the limit order might not be executed and be left pending when the market goes off of your stated price before the order can reach the exchange.
In case of a market order, it’ll be executed at whatever market price there is at the time the order reaches the exchange.
In the case where you are short selling, your stop loss order will be a buy order and will be placed at a price higher than your sell price of the main order as that is the direction where you are probable of making a loss.
Great so how do I actually do it?
Placing a stop-loss order is simple. Let’s first have a look at a bought contract whose stop-loss order is a sell order. Start by clicking on the contract you want to place a stop loss for and right click on it to select sell order.
This is what the window will look like
Click on the Order Type drop down to select SL or SL-M.
When you choose SL you have to enter the trigger price and the price at which you want to sell the contract
You can then click submit and execute your order. In the case where you want to place a market stop-loss order, select SL-M from the order type drop-down list.
On the other hand, when you have short sold an instrument, the stop-loss order will be a buy order. Again, you can right-click on the main order and select ‘Buy Order Entry’. Which will bring you to the buy order window similar to the sell order window.
Select SL there for a limit stop-loss and SL-M for a market stop-loss
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If you choose SL, enter your trigger and buy price and then click submit to place the order.
For a market order stop-loss you simply have to select the trigger price where the order should be activated.
As easy as this was, it is necessary to understand some of the key concepts here.
- Stop-loss is a judgment you must take keeping in mind your personal capacity to take the risk and the expected volatility of the stock.
- Always keep in mind that the type of stop-loss you put (limit or market) will decide how your stop-loss is executed and how much loss you will actually make.
- Due to the nature of a limit stop-loss, always place it at a slightly more profitable place than the worse you think it can get.
We also offer you a trailing stop-loss which moves towards your set target every time the share market moves in your favor. It’s a feature available with bracket orders and we have a blog about bracket orders. Stop Loss orders can be made an integral part of your order if you use a cover order or a bracket order. You can read further about cover orders on another blog we wrote. The benefit of these orders is the added exposure and hence the reduced margin money requirement on each. Our knowledge base has all the details for exposures across orders.
I hope that this blog helped you understand a stop loss better. If there is anything else that you would want us to write about, please feel free to comment below and we will try our best to bring it to you!
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Many Thanks for your prompt reply !
In case of SL-M order you just have to enter the trigger price. Once the market is hit to trigger price, it activates and order is placed at the next available price after it is triggered. Hence the name is stop loss market order. The field for stop loss price is disabled when you select SL-M.
`For a market order stop-loss you simply have to select the trigger price where the order should be activated’. OK. Trigger price is the position entry price to execute the order for SL-M order. Then what will be the stop loss price ?. Kindly explain.
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