What is meant by stop loss order, its types and benefits.
Stop loss order
A stop loss is an order type where a trader states to buy/sell a security once the price of security rises above or falls below specified stop price. By using this order type a trader does not need to monitor how stock is performing every-time as order will be automatically executed when stop price is reached. Precise level of stop loss helps in better management of risk while trading in market. Financial advisory services providers can be consulted to get recommendations on levels of stop loss which should be used at the time of trading.
Types of stop loss orders
1. Stop loss limit order
A trader states to buy/sell security at price level no more/less than a specified limit price by using it. This order types gives trader full control on price level on which order will be executed, but sometimes it may prevent order to get executed as it can be executed by exchange at limit price or lower.
Example: A trader with short position wants to protect his position but does not want to pay more than Rs.200 for a stock. In such case trader can place stop loss buy limit order where he can buy at any price up to Rs.200.
2. Stop loss market order
Using this order type a trader states to buy/sell a stock once its price rise above or fall below specified price level. Once stop price is reached the stop order gets converted to market order not limit order. It can be said that stop loss market order is a order to buy/sell at current market price at time when stop price is reached. Here trader has no control on price at which order will be executed.
Benefits of using stop loss orders
- Traders do not need to monitor performance of stocks on daily basis.
- It saves traders from negative balance.
- It helps in contorting small losses and stops them to further get converted in to bigger ones.
- Traders can effectively manage risk by using it.
- It gives emotional support to traders when market condition is not good.
Stop loss order contributes in controlling losses while trading in market. Traders should always place there orders carefully after understanding their risk bearing capability. Experts suggestions on mcx tips, trading tips and more can also be referred to be on the safer side and get positive trade results. New traders should understand the importance of using stop loss at time of trading and must use them to avoid earning negative returns from market. In order to become a successful stock market trader it is required to learn how to manage risk in best possible way.