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What are stop loss orders and how to use them?

A stop-loss order is a buy/sell order placed to limit the losses when you fear that the prices may move against your trade.

So for example, if you have bought a stock at Rs 100 and you want to limit the loss at 95, you can place an order in the system to sell the stock as soon as the stock comes to 95. Such an order is called as a 'Stop Loss', as you are placing it to stop a loss more than what you are ready to risk.

There are 2 types of Stop-Loss orders:

1. SL order (Stop-Loss Limit) = Price + Trigger Price
2. SL-M order (Stop-Loss Market) = Only Trigger Price

Case 1 > if you have a buy position, then you will keep a sell SL

Case 2 > if you have a sell position, then you will keep a buy SL

In Case 1, if you have a buy position at 100 and you wish to place an SL at 95.

a. SL-M order type - you will place a Sell SL-M order with trigger price = 95.
Here, when the price of 95 is triggered, a sell market order will be sent to the exchange and your position will be squared off at market price.

b. SL order type - you will place a Sell SL order with price and trigger price. Since your order needs to be triggered first, the (trigger price ≥ price.) Here, this order type gives you a range of the Stop-Loss.

Let's assume a range of Rs 0.10 (10 paise). Here, you can keep trigger price = 95 and price = 94.90. When the price of 95 is triggered, the sell limit order is sent to the exchange and your order will be squared off at the next available bid above 94.90. So, your SL order may get executed at 96 or 94.95 but not below 94.90.

The disadvantage of this order is that if the market falls steeply, then after 95 is triggered and before the Sell Limit order of 94.90 is sent to the exchange if the stock price is already below 94.90, then your Stop-Loss order will still be open and your losses could be much higher.
You will have to use your discretion whether to use SL or SL-M depending on the market scenario.

In Case 2, if you have a sell position at 100 and you wish to place an SL at 105.

a. SL-M order type - you will place a Buy SL-M order with trigger price = 105.
Here, when the price of 105 is triggered, a buy market order will be sent to the exchange and your position will be squared off at market price.

b. SL order type - you will place a Buy SL order with price and trigger price. Since your order needs to be triggered first, (the trigger price ≤ price.) Here, this order type gives you a range of the Stop-Loss.

Let's assume a range of Rs.0.10 (10 paise). Here, you can keep trigger price = 105 and price = 105.10. When the price of 105 is triggered, the buy limit order is sent to the exchange and your order will be squared off at the next available offer below 105.10. So, your SL order may get executed at 105.05 or 104, but not above 105.10.

Alternate use of SL order:

Since Sell SL orders are used above your buy price and Buy SL orders are used below your sell price, you can use these order types to Buy above LTP (Last Traded Price) and Sell below LTP.

1. To buy above LTP, you can place a Buy SL order with the price at which you want to buy.
2. To sell below LTP, you can place a Sell SL order with the price at which you want to sell.