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How can You Make Use of Stop Loss and Stop Limit Market Orders

05 Jan 2023

If you have the enthusiasm to venture into trading in the stock market, you will come across various terms and these represent strategies and activities that you have to engage in while trading. To make your trading seamless, it's a good idea to get familiar with terms and the meaning of these so that they can be employed during your trading activity easily. Terms that you may frequently come across are stop loss and stop limit. 

An Overview of Stop Loss and Stop Limit

Investors and traders who wish to put some limit on any potential losses can make use of many kinds of orders to enter the market and exit it when they are not able to manually place orders. Two tools that accomplish this activity are stop loss orders and stop limit orders. They are different terms and hence, they express different activities undertaken by traders. Hence, in the arena of online trading, it is essential that you know what both are and how they differ. 

What are Stop Loss Orders?

When you speak of stop loss orders, there are two kinds that exist while trading in the stock market. One is used to protect positions which are long, and this is called a sell stop order. The other is used to limit a trader’s losses on any positions that are short, and this is known as a buy stop order. 

What a sell stop order does is protect long positions. It operates this activity by triggering a sell order in markets in case the price of a stock falls under a specified level. The assumption underlying this tactic goes this way: if the price of a stock drops to this level, it may continue to drop to further levels. Therefore, any loss is capped when the stock is sold at a particular level. If you look at the picture conceptually, buy sell orders work in much the same way as sell stop orders. However, they are used by traders to secure positions which are short. The price that is determined by a buy stop order will remain above the present price in the market, triggering in case the price goes above a particular level. 

What are Stop Limit Orders?

There is some similarity between stop loss orders and stop limit orders. As the name aptly suggests, a limit on the price that is executed exists. In such a scenario, two prices are specified in an order with a stop limit. The first is the stop price, converting the order into an order to sell (sell order), and the second, the limit price. The limit price is the price of a stock that has to be reached for a trader to sell the stock at. Consequently, the stock may be sold at the limit price or any price higher that the stock reaches. 

In a stock market that experiences volatility, there may be no guarantee that orders necessarily will be filled. Traders use stop-limit orders in circumstances in which the stock price may have dropped under the limit value, and investors are unwilling to sell at present low prices. They would rather be patient and see the stock rise to the limit price once more. 

Vital Knowledge

When you open a Demat account online and head out into online trading, you must know how to mitigate risk and you can learn more about stop loss and stop limit terms to do this. When you trade with Motilal Oswal, your queries are answered and you are taken forward into fruitful trading activity. 

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