A trade that gets executed at a far away price from the current market price is called a 'freak trade'. Freak trade occurs owing to a shallow market depth (low liquidity). A freak trade can also occur if your trade coincides with a large market order.

When you place a market order, there is always an inherent risk of losing money due to a freak trade.

A limit order on the other hand guarantees price execution at a specified price (avoids freak trade), but there is no guarantee of the order fill itself.

But there is a way to have the best of both order types, i.e to enjoy the price protection of a limit order (hence no freak trade) and also enjoy the order fill guarantee of a market order.

Use Stoploss limit order as Stoploss market orders.

A Stoploss order is a type of order where you specify a trigger price at which either a limit order or market order is placed. These triggers are placed on the exchange and not within the broker systems.

Similar to how a limit order can be used as a market order, you can also use the SL - L (stop loss limit) order as an SL-M (stop loss market) order. To do this, you need to ensure you place a limit price, higher or lower than the trigger price depending on whether you intend to buy or sell.

Here is an example -

Stock = ITC

Position = Short

Short price = 245

CMP = 241

SL trigger = 248

SL limit = 258

Here, the SL limit buy price at 258 will get placed as soon as the market price equals the SL trigger price of 248. But since 258 is much higher than the current market price of 248, the limit price essentially works as a market order and gets filled between 248 and 258.

In the event, another large market order coincides with your order, the limit price at 258 will act as a protection against a freak trade.

Similarly, if you place a SL sell limit order with a price below the current market price, your SL limit order will act as an SL market order.

For example, assume you are long on Nifty 17500 CE and its current price is Rs.185. You place an SL limit sell order at Rs.170 with a trigger price of Rs. 180.

Since the current market price is Rs 185 and you are placing the SL limit sell order at a lower price, this order will act as a market order and execute immediately. Here, your order will sell all available quantities up to Rs 170.

In this case, if there is a large market order coinciding with your order, resulting in a price spike, then your limit order will ensure you are protected against the spike by limiting your sell price to 170 and not lower.

Note: The farther the limit price from the trigger price, the lesser the chances of your limit order going pending, but higher the potential impact cost.

NSE has stopped supporting SL-M order type for options from Sep 27th 2021.

To know how to use limit order as a market order, click here .