The primary objective of a stop loss order as the name suggests is to STOP A LOSS. The importance of a stop loss as a part of the trading strategy has been explained in the guidelines on how to trade successfully in the markets.
A stop loss order pushes the order into the system, only if a certain pre determined trigger is hit. For Eg: if one wishes to sell a scrip which is trading at Rs 105 only if its price goes below 100.
Stop loss orders are of 2 types:
- Stop Loss Limit Order
- Stop Loss Market Order or Stop Loss Orders
Stop Loss Limit Definition
In a stop loss limit order, the order that is sent to the exchange after the trigger is hit is a “limit order”, i.e. the trade price needs to be defined by the user.
Stop Loss Limit and Stop Loss Market
The fundamental difference between stop loss limit and stop loss market orders is that the trigger order is a limit order in the former case and a market order in the latter.
Stop loss Limit price and Trigger price
in stop loss limit order, while entering the order – 2 types of prices are required to be entered – the trigger price and the limit order price. Without entering both these prices, the order will not be accepted.
Stop loss limit order example
To continue with the above example, if one wishes to sell the security only till 98 after it falls below 100, then along with the trigger price of Rs. 100, the limit trade price of Rs 98 would also have to be entered.
In Stop Loss limit order, there can be a scenario where the limit order does not get executed and remains pending. If in the above case, the price after touching Rs.100 goes directly below 98, then the order will go to the exchange but since the price is below 98, the order will remain pending and not get executed. This scenario is often referred to as order jumping due to a gap up or gap down movement in the prices of a stock.
In the Image above which is a stop loss limit sell order example, the limit price is Rs. 99.85 and the trigger price is Rs. 100. This option needs to be selected at the time of placing a sell order.
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