What are the types of Stop Loss orders, How to use them?

Short Answer

Stop-loss orders are used to limit the losses in case your view goes grown. An SL-M or Stop Loss Market order ensures your position is squared off at the market price if the trigger price is reached. Whereas in an SL Limit order, a separate trigger price has to be added, which when reached will forward the limit price to the exchange.

Detailed Answer

What is a Stop Loss?

A Stop-Loss is a type of order that is used to curtail your losses in case the trade goes against you. Similar to a limit order, a Stop loss order squares off your trade if the price mentioned on the order is reached.

For example, you purchased a stock at Rs 1,000 with a target of Rs 1,050. Simultaneously, you do not want to lose more than Rs 20 in the trade. Therefore, you can place a stop-loss order at Rs 980 so whenever the price of the stock drops to 980, your position will be squared off and you will be out of the trade.

Types of Stop Losses

Now that you have seen what is a stop-loss order, let's look at the two types of stop-loss orders.

  • Stop-Loss (Limit)
  • Stop Loss-M (Market)

1. Stop Loss order (Limit)

In an SL or a stop-loss limit order, you’ll have to enter two prices. One as the Stop loss price and the other as a Trigger price. SL order allows you to exit your trade at one single price. For instance, if you want to place a stop loss at 980, you can place the trigger price at around 982. Hence, whenever the price falls below 982, the SL order will be forwarded to the exchange which will square off your position at your desired price (980).

The only downside of using an SL order is, if there is a violent move in the underlying stock or index then your order might be unfulfilled. This can result in further losses or drawdowns.

2. Stop Loss-M order (Market)

In an SL-M (Stop-Loss Market) order, you provide only one price which is the trigger price. Here, your position is not squared off at the same price as your SL (Limit) order. Instead, when the trigger price is reached, your position will be squared at the market price. With an SL-M order, you don’t have to worry about your stop loss not getting executed. But as per the market conditions, there can be a small slippage from your desired price if you use an SL-M order.

Which Stop Loss order to use?

The ideal way to select a stop loss is by looking at the market condition. In an extremely volatile market, placing an SL-M order would be more efficient. If the underlying makes a massive move on either side, you will be still able to get out of your trade. However, with an SL order, your order might not get executed in such a case. On the other hand, if you are trading with enormous quantities and cannot afford much slippage, then you can place an SL (Limit) order, where you could get out at a specific price.

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Categories: Stock Trading
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