What is a Stoploss order?
A Stoploss order is an order price condition that helps investors limit losses on a position by buying a security as its price rises and hits a specified trigger price or selling a security as its price declines and reaches a specified trigger price.
So for a buy (long) position, a sell stop-loss order is placed below the current market price. And for a sell (short) position, a buy stoploss order is placed above the current market price.
The two types of stop-loss orders include Stoploss Market (SLM) Orders and Stoploss Limit Orders.
- Stoploss Market (SLM) Orders involve placing your order with only a Trigger Price. When the market price of the concerned share reaches the set trigger price, a market order is sent to the exchange (at the prevailing market price), and your position is squared-off.
Let us look at a few scenarios on the usage of stoploss market orders.
Scenario 1: To protect profits
Ms Parvathy has purchased 200 shares of Federal Bank at Rs. 100 per share (Rs. 20,000).
The price of Federal Bank rises to Rs. 200.
Expecting further gains, Ms Parvathy decides to hold her position but wants a minimum of Rs. 10,000 as profits. So, she places a stoploss sell market order for 200 shares of Federal Bank at Rs. 150 per share. With this, a sell order is triggered and sent to the exchange if and when the share price reaches Rs. 150, ensuring that a profit of Rs. 10,000 is guaranteed.
Scenario 2: To minimise losses
Taking the above example, Ms Parvathy has purchased 200 shares of Federal Bank at Rs. 100 per share (Rs. 20,000).
The price of Federal Bank falls to Rs. 80, giving Ms Parvathy an unrealised loss of Rs. 4,000. She decides that she does not want to incur losses in excess of Rs. 10,000. So, she places a stoploss sell market order for 200 shares of Federal Bank at Rs. 50 per share. With this, a sell order is triggered and sent to the exchange if and when the share price reaches Rs. 50, ensuring that she is protected from further losses.
Scenario 3: To take advantage of trends/breakouts
Stoploss orders can also be used to enter positions based on trends or breakouts.
Assume Federal Bank shares have been trading between Rs. 80 to Rs. 100 for a while. Ms Parvathy is not interested in owning these shares if it is trading in this range, and believes that a breakout above Rs. 101 might lead the price to move up to Rs. 150 per share. So, she places a stoploss buy market order for 200 shares at Rs. 101. With this, a buy order is triggered and sent to the exchange if and when the share price reaches Rs. 101.
In this scenario, Ms Parvathy could have purchased Federal Bank shares at a cheaper rate than Rs.101, but she didn't want to enter the trade till the share price reached the upper level of her breakout range (i.e., Rs.101).
- Stoploss Limit Orders involve placing your order with a Trigger Price and a Limit Price. When the market price of the concerned share reaches the set trigger price, a stoploss limit order is sent to the exchange at the given limit price. The trade is only executed when the limit price is reached.
For example, Ms Sruthy has purchased 200 shares of Federal Bank at Rs.100 per share (Rs. 20,000). She places a stoploss limit sell order at a trigger price of Rs. 80 per share and a limit price of Rs. 78 per share.
Hence, when the market price of Federal Bank reaches Rs. 80, a sell limit order at Rs. 78 per share is triggered and sent to the exchange.
If Federal Bank's share price faces a sharp drop (from Rs. 81 to Rs. 75), Ms Sruthy's sell order does not get executed as the limit price was set at Rs. 78 per share.
Relation between Trigger Price and Limit Price in a Stoploss order:
| Order Type | Order Placement Conditions |
|---|---|
| Buy Stoploss Market Order | The trigger price must be higher than the last traded price |
| Sell Stoploss Market Order | The trigger price must be less than the last traded price |
| Buy Stoploss Limit Order | * The trigger price must be higher than the last traded price * The limit price must be higher than the trigger price For example, if the trigger price is set at Rs. 100, the limit price should be set above Rs. 100. |
| Sell Stoploss Limit Order | * The trigger price must be less than the last traded price * The limit price must be less than the trigger price For example, if the trigger price is set at Rs. 100, the limit price should be set below Rs. 100. |
To place a Stoploss order on FLIP / TraderX:
Select the Price Condition as STOPLOSS / SLM in the order placement window
Note : SLM (Stop Loss Market) is not available in BSE and for options trading in NSE.
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