It is pertinent to know that how execution of a stop loss trade takes place as this way one is aware that finally on putting the stop loss how it is going to yield result for him. Read more about why stop loss is required here.
As per Investopedia stop loss has been defined as an order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor’s loss on a position in a security. Although most investors associate a stop-loss order only with a long position, it can also be used for a short position, in which case the security would be bought if it trades above a defined price. A stop-loss order takes the emotion out of trading decisions and can be especially handy when one is on vacation or cannot watch his/her position. However, execution is not guaranteed, particularly in situations where trading in the stock is halted or gaps down (or up) in price. Also known as a “stop order” or “stop-market order.”
With a stop-loss order for a long position, a market order to sell is triggered when the stock trades below a certain price, and it will be sold at the next available price. This type of order works well if the stock or market is declining in an orderly manner, but not if the decline is disorderly or sharp.
A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a trigger price. The stop-loss order gets activated when the trigger price is reached/crossed and enters the market as a market order or as a limit order, as defined at the time of placing this stop-loss order.
To illustrate, suppose a trader buys ABC Ltd. shares at Rs 200 in expectation that the price will rise. However, prices starts declining below his buy price, trader would like to limit his losses. Trader may place a limit sell order specifying a trigger price of Rs 190 and a limit price of Rs 184. The trigger price has to be between last traded price and limit price while placing the sell limit order. Once the market price of ABC breaches the trigger 190 price i.e. Rs 190, the order gets converted to a limit sell order at Rs 184. (Trigger Price is the price at which the order gets triggered from the stop loss book.)
Just remember that stop loss is not your enemy but is a friend as it is a risk control mechanism. Thus always use it while trading to avoid any unwarranted situations and is a must in uncertain times when volatility is high. Check How Stop Loss can Protect your Profit Here.
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