What is Stop Loss in trading?

Authored by
Team Espresso
December 27 2022
4 min read

Stop-loss orders are instructions to purchase or sell a security at market price whenever a specified price, or "stop price," is reached. Traders can restrict their loss or lock in a profit on a current position by using a stop-loss order. 

Stop orders are orders to buy or sell an asset at a predetermined stop price, while stop-limit orders are orders to buy or sell a security at a predetermined price. A stop-loss order will always be executed, but a stop-limit order does not always get filled (assuming there are buyers and sellers for the security).

A trader may buy a stock and set a stop-loss order at 10% below the stock's acquisition price. A stop-loss order is an instruction to sell stock at the best available price if the cost of the stock falls below a certain threshold, in this case, 10%.

Although stop-loss orders are typically used to protect long positions, they can also limit losses in short positions. If the security trades at or above the specified price, the option is closed by buying an equal amount to offset the fast part. Here is everything to know about what is stop loss order.

How to use Stop loss order

Now that you know the stop loss meaning, you have to understand how to use it. If a trade displays a modest profit, the trader will typically move the stop-loss order to a new location where it will protect some of the trade's winnings. Let's imagine that the price of EUR/USD rises from 1.1500 to 1.1600 after the trader buys at 1.1500. A trader who has already made a profit might safeguard nearly half of that amount by placing a stop-loss order at 1.1540 if the market turns against them.

When the market price rises, traders can use raise their stop-loss order automatically. Almost any trading platform will allow you to set up trailing stops with minimal effort. The stop order will lag behind the market high by the number of pips (or dollars) the trader specifies. 

Even though stop-loss orders are a vital part of any trader's risk management arsenal, they cannot eliminate the possibility of a loss. If a trader places a stop-loss order and the market opens below that price, the order will be filled near the opening price, regardless of how far below that price.

Types of Stop Loss Order

Now that you know what a stop-loss order is, we'll review the two different kinds:

● Stop-Loss (Limit)

● Stop Loss-M (Market)

Stop-Loss (Limit)

You should know about what stops loss in the share market. Stop-loss (SL) orders, also known as limit orders, require two prices. One is to be used as a loss limit and another as an action point. A Stop-Loss (SL) order closes a trade at a predetermined price. At set a stop loss at 980, for instance, you would set the trigger price to roughly 982. As a result, the exchange will execute your SL order to close your position at your target price of $982 whenever the price drops below that threshold (980).

An SL order won't be filled only if the underlying stock or index has a sudden and extreme price change. Additional losses or drawdowns may come from this.

Stop Loss-M (Market)

When placing a stop loss Market (SL-M) order, you specify only one price, which acts as the order's trigger price. In this case, your SL (Limit) order will not be filled at the same price at which your position is squared off. Instead, your position will be squared at the current market price once the trigger price is achieved. The risk of your stop loss order not being carried out is eliminated when you use SL-M. However, if you utilize an SL-M order, you may experience some variation from your target price due to fluctuations in the market.


Q. In what ways does the Stop Loss order fall short?

In the event of a sharp decline in the market, your Stop-Loss order will remain open after the 95 thresholds is reached, even if the stock price has fallen below the Sell Limit of 94.90 and before the Sell Limit order is transmitted to the exchange.

Q. Do daily stop-loss orders have to be placed?

A stop-loss order has a 24-hour time limit on its effectiveness. Stop-loss orders that aren't executed before the trading day ends will expire without further action from you.

Q. Can a stop-loss be established at any time?

Stop-loss orders can be set and adjusted in real-time on most trading platforms when a trade is executed. When a stop-loss order's predetermined price is reached, it automatically converts to a market order.

Q. What will happen if the market opened lower than the stop-loss?

Stop-loss orders can backfire if a stock suddenly drops below the stop price. If the stock were trading at a price significantly lower than your stop-loss level, the order would still be executed, and the shares would be sold at the next available price.

While the current ratio considers all current assets like inventories and prepaid expenses, the quick ratio looks at those assets that can be converted into cash quickly.


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