A stop-loss order is a buy/sell order placed to limit losses when there is a concern that prices may move against the trade. For instance, if a stock is purchased at ₹100 and the loss is to be limited at ₹95, an order can be placed to sell the stock as soon as its price reaches ₹95. Such an order is known as a 'Stop Loss' as it aims to prevent a loss exceeding the predetermined risk.
There are two types of Stop-Loss orders:
- SL order (Stop-Loss Limit) = Price + Trigger Price.
- SL-M order (Stop-Loss Market) = Only Trigger Price.
Example Scenario
Case 1: A sell SL is maintained if there is a buy position.
Case 2: A buy SL is maintained if there is a sell position.
In Case 1, for a buy position at ₹100 with an SL set at ₹95:
a. SL-M order type: A Sell SL-M order is placed with a trigger price of ₹95. When the price reaches ₹95, a sell market order is sent to the exchange, and the position is squared off at the prevailing market price.
b. SL order type: A Sell SL order is placed with a price and trigger price. The trigger price must be greater than or equal to the price. This order type allows for a range of the Stop-Loss. For instance, a trigger price of ₹95 and a price of ₹94.90 can be set. When the trigger price of ₹95 is reached, a sell limit order is sent to the exchange, and the order is squared off at the next available bid above ₹94.90. Thus, the SL order may be executed at ₹95 (or higher) or ₹94.95 but not below ₹94.90.
The disadvantage of this order type is that if the market sharply declines and the stock price is already below ₹94.90 when the trigger of ₹95 is reached, the Stop-Loss order remains open, potentially resulting in higher losses. It is important to exercise discretion in choosing between SL and SL-M orders based on the market scenario.
In Case 2, for a sell position at ₹100 with an SL set at ₹105:
a. SL-M order type: A Buy SL-M order is placed with a trigger price of ₹105. When the price reaches ₹105, a buy market order is sent to the exchange, and the position is squared off at the prevailing market price.
b. SL order type: A Buy SL order is placed with a price and trigger price. The trigger price must be less than or equal to the price. This order type allows for a range of the stop-loss. For example, a trigger price of ₹105 and a price of ₹105.10 can be set. When the trigger price of ₹105 is reached, a buy limit order is sent to the exchange, and the order is squared off at the next available offer below ₹105.10. Thus, the SL order may be executed at ₹105.05 or ₹105 but not above ₹105.10.
Alternatively, SL orders can be used in the following manner:
Since Sell SL orders are used below the buy price, and Buy SL orders are used above the sell price, these order types can be utilized to Buy above the Last Traded Price (LTP) and Sell below the LTP.
- To buy above LTP, a Buy SL order can be placed with the desired purchase price.
- To sell below LTP, a Sell SL order can be placed with the desired selling price.
Did you know? NSE has stopped supporting SL-M order type for options. To learn how to use Stoploss-limit(SL) order as Stoploss-Market(SLM), see How to use Stoploss-limit(SL) order like a Stoploss-Market(SLM) order?
