Trigger price is the price entered by a trader during stop-loss limit and stop-loss market orders. Let's understand this in detail. In Zerodha following this mechanism is really simple.
In the stock market, big moves often dictate the difference between profits and losses, but sometimes, in fact almost all the times, it is the little intricacies like the time of buying and selling of stocks that might have the same implications. These intricacies could be as little as the right price of selling, which can obviously make you profits. But if used properly, it can also help in limiting your losses effectively, which is often what trading is all about. One such mechanism is Trigger Price mechanism, available across most brokers. Let’s get into it!
While buying and selling in the stock market, there basically three types of orders, namely Limit Pricing, Market Pricing and Trigger Pricing. Of course, there are a ton of other types of orders, like bracket order for example. But, for the scope of this discussion, we focus our attention to the aforementioned three types of orders.
Note, that the type of order you select depends on your trading strategy, which means it has no indication to the exchange whatsoever, these are simply services provided by almost all brokers, especially the online ones.
A limit pricing order is a BUY order, which is basically like saying, ‘Hey broker, buy stock X when it reaches price Y’ As simple as that, the terminal would simply buy the stipulated asset when it hits the stipulated price.
A market priced order is similar, but instead of a stipulated price, the order just specifies the asset to be bought and buys that at the current market rate.
A trigger price order is mainly a SELL order, which is mainly used with STOP LOSS. A stop loss is simply cap for the losses that can be sustained, a limit provided by the trader to the broker. Needless to say, the stop loss price would always be below the buying price. A stop loss simply means if the price falls below this order, just sell the asset in order to prevent further cumulative losses.
Then, that makes Trigger Price mechanism sort of like an alarm, but without the snooze button. If place between scales of a spectrum, a trigger price falls below the buying price, but just a little above the stop loss price, a negligible quantum. A trigger price ‘triggers’ the stop loss mechanism, which is to say it is yet another cap for the losses, but it is different than stop loss. A stop loss order would issue the sell order at the stipulated price of the stop loss.
In case of a trigger price, there can be two alternatives:
When the trigger price hits, the broker would issue the sell order, but at the price stipulated by the stop loss.
Suppose you buy stock X at Rs.100. You put the stop loss at Rs.95, and the trigger price at Rs.96. You see when the stock falls down to Rs.96, what it does is basically alarm the broker to sell the stock at stop loss price, Rs.95. The main reason for this is basically, when the price is falling, especially when the price is falling rapidly, so does the demand. So, by the time the price hits Rs.96 and the order is issue, it may happen that the price may have fallen below Rs.95 as well, but it may also happen that the price stabilises at Rs.96 but the demand is null, so the price has to be reduced in order to sell.
If no stop loss is specified, the broker sells at the best possible price, which is the then market price of the stock.
While studying the aforementioned theory, it should be noted that you can very well have stop loss above the buying price, indicating to say that it is a cap for your profit. With that, your trigger price would also be above the buying price.
In Zerodha, using this mechanism is really simple.
1.Open Kite, Zerodha’s trading terminal for web based/mobile trading.
2.Select the stock you want to buy, add it to your watch list.
3.Select the type of fund investment after clicking on BUY, MIS or CNC.
4.Click on SL if you want to define the STOP LOSS price, else click on SL-M which basically means your stop loss becomes the market price.
5.Enter the desired Stop Loss price, if selected SL. If selected SL-M, there will be no such option.
6.Enter the desired Trigger price, beside the stop loss price.
7.Click on BUY.
By following these steps, you can successfully use trigger pricing and stop loss to your advantage. Trading can be confusing, especially when there are such features which are almost similar but not so much, so don’t let your stock market education stop here.