Procedure for Placing Stop Loss Orders: Types of stop loss orders
- 03 May 2023
- By: BlinkX Research Team
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Stop loss orders are an essential instrument in the toolbox of Indian investors and traders engaging in online share trading. In the event of negative market movements, these orders enable traders to protect their positions and reduce their losses. Lets walk through the procedure of how to place a stop loss order in this article, and will also tell you what they are, how they function, and how to use them in India.
What is a Stop Loss Order?
A stop loss order is an order that an investor or trader places to have a stock, or other securities, automatically sold once it hits a particular price. So, the purpose of the order is to limit the possible losses that an investor or trader could incur in an instance of the stock experiencing a negative price movement. Stop loss orders may be used at any point of time during the trading session for both long as well as short positions.
Table of Content
- What is a Stop Loss Order?
- How do Stop Loss Orders Work?
- Types of Stop Loss Orders
- How to Place a Stop Loss Order
- Conclusion
How do Stop Loss Orders Work?
When a stock or asset reaches a particular price level, stop loss orders automatically execute a sell order. Suppose a trader buys a stock for Rs. 100 and sets a stop loss order at Rs. 90, for instance, the order will be carried out if the stock drops to Rs. 90 or less. By doing this, the trader makes sure that their losses are capped at Rs. 10 per share.
Profits can also be locked in with the help of stop loss orders. If a trader buys a stock for Rs. 100, and the price climbs up to Rs. 115. The trader doesn’t want to book profits, so they place a stop loss order at Rs. 110, for example. In an event where the stock climbs to Rs. 110 or higher, and then falls to Rs. 110, the stop loss order will be executed. By doing this, the dealer guarantees a profit of at least Rs.10 per share.
Types of Stop Loss Orders
Market Stop Loss Order: It is the most common kind of stop loss order, and once the stop loss threshold has been met, it is executed at the current market price.
Limit Stop Loss Order: Once the stop loss level is reached, this form of stop loss order is carried out at a specific price or better.
Trailing Stop Loss Order: Stop loss orders that trail are those that are based on a set or percentage sum. As the price of the security increases in the trader's favour, the stop loss level is automatically changed.
How to Place a Stop Loss Order
In India, putting stop loss orders is a rather straightforward process. The actions that traders must do are listed below:
Step 1: Open a Trading Account with a Broker
Opening a trading account with a broker is the first step for placing stop loss orders—traders obviously need a trade account to trade; without one they are unable to place any market order, let alone stop loss orders. Opening trading accounts gives the trader access to the stock markets and a trading platform.
Step 2: Login to the Trading Platform
The trader must then sign in to the broker's trading platform once their trading account has been opened.
Step 3: Select the Security to Trade
The trader's choice of security is made in the following phase. This can be done by typing the security code or name into the trading platform's built-in search box.
Step 4: Select the Stop Loss Order Type
The trader must decide the type of stop loss order they intend to use to limit their losses. The trader has the option of using trailing stop loss orders, limit stop loss orders, or market stop loss orders.
Step 5: Enter the Stop Loss Price
The trader must input the stop loss price after selecting the stop loss order type. The price at which the order will be filled is indicated here.
Step 6: Place the Stop Loss Order
The trader must then click the "place order" button to put the stop loss order. Once the stop loss threshold has been met, the order will automatically be executed.
Conclusion
Stop loss orders are a crucial tool for traders as well as investors in India because they assist them to safeguard their holdings from unfavourable market moves and to limit potential losses. Market stop loss, limit stop loss, & trailing stop loss orders are some of the numerous stop loss order types available to traders. Stop loss orders can be placed via the trading platform that the broker provides, and the process is rather simple in India.
By implementing stop losses, investors can better control their risk and find success in the stock market. Trading professionals can better control their risk and improve their chances of market success by employing stop loss orders. Stop loss orders do not, however, ensure protection from all market risks; therefore traders ought to always have a reliable risk management plan in place.
