What Is A Stop Loss Order?

In simple terms Stop loss is an automatic order set by the trader to minimize his loss. For instance, if we buy a stock for 1000 rupees; if it goes above 1000, we can book a profit, but there’s a possibility that the price may go below 1000 as well, it could go down to 950, 900 or even to 800.

But if we set our stop loss at 950, we can limit our loss, this means the system will sell our stock automatically as soon as the price hits 950. That way we lose just 50 points even if the market goes further down.

But if the market goes up, above 1000, we can book our profit. Also, when a stop loss is placed for a product, the price fluctuation of that script must be taken into consideration. For this, you need to know how to set stop loss spread. Spread is the minimum difference that you wish to maintain between the market price and stop loss order trigger price. But, for every script, the spread set would be different as the price movement varies from script to script. For instance, let’s take crude oil there’s a leap of 10 to 20 points in the market.

So when we set a stop loss at such a time and the market price and the trigger price are set at the same value, there’s very little possibility for the order to get executed as there could be a leap here.

Key Points

• Stop loss is an automatic order set by the trader to minimize his loss.

• Spread is the minimum difference that you wish to maintain between the market price and stop loss order trigger price.

• Trigger price is basically like an alarm.

• It’s important to place the SL and SLM based on the market volatility.

• Stop loss is like insurance which helps to protect your capital from possible loss.

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