What is the Procedure for Placing Stop-Loss Orders

Last Updated: 10 Nov 2023

Once you have understood the concept of stop-loss, the next step is to understand the stop loss procedure or how to place the stop loss. Let me start with a simple example. You bought 1000 shares of stock at a price of Rs.145. The technical chart tells you that the strong support for the stock is at Rs.135. That means, ideally you should keep the stop loss a tad below Rs.135 so that if the underlying direction of the trend change, you book loss and exit the stock. However, you don’t want to lose more than Rs.6,000 in the trade. What should you do? The simple stop-loss procedure here is to give priority to your willingness to take a loss and second priority to the technical levels. In this case, you could have either waited for the stock to come down Rs.4 to initiate the trade or if you have initiated the trade then keep the stop loss at Rs.139, even though the support is Rs.135. Ultimately, affordability wins.

We now come to the steps to place a stop loss. Remember that stop loss is also order so you place a stop-loss order in the opposite direction of the actual order. That means; if you are placing a buy order, then your SL order must be a sell order and if you are placing a sell order then your SL order must be a buy order. The next of the steps to place stop loss is to decide whether you want to place a market stop loss or a limit stop loss. Let us look at the process in greater detail.

What is the procedure for placing stop-loss orders = 600

Let us assume that you buy 1000 shares of REC Ltd at Rs.200, but are only willing to lose Rs.5,000 on the trade. Just set a stop loss at Rs.195. If the stock goes down to Rs.195, stop loss is triggered and your position is closed. Yes, you made a loss but you protected your capital by restricting your loss to just Rs.5,000. There will be brokerage and statutory costs but these are known and you can prepare for that. Always take a full-cost view.

When you place a buy order, stop loss is a sell order to limit losses when you apprehend that the prices may move against you. Similarly, when you place a sell order, your stop loss will be a buy order to limit losses if the stock price rises instead of falling.

Stop-loss order for a buy position

Let us say, you bought a stock at Rs.250 but don’t want to hold the stock if it goes below Rs.244. This is how it will work in the case of a stop loss – market order (SL-M) order and in the case of a simple stop loss (SL) order.

1. In SL-M order, you select and place “Sell SL-M order” and you can set the trigger price of the order at Rs.244. If the stock touches Rs.244, the SL-M order will be sent to the exchange, and the position is squared off at market price. Your actual execution may likely be a few bids away due to liquidity, or the absence of it.
2. Now let us turn to an SL order or a plain Stop Loss order. You place SL orders with sell price and trigger price. The order is triggered first, which can be set at Rs.244, and the worst-case price at Rs.243. The practical side is that when the price of Rs.244 is triggered, the sell limit order is sent to the NSE. The next will be a square-off instruction but never will it be lower than Rs.243. That limits your risk.

Let us quickly sum it up

• Set stop-loss based on the order. If a buy order, then a stop-loss order will be a selling order, and if it is a sell order then a stop-loss order will be a buy order.
• Decide the stop-loss price, it can either be based on technical support levels or it can be based on how much you can afford to lose.

First, decide whether you want to place an SL order or SL-M order at your discretion.

What is stop loss

Stop-loss is a kind of protection or insurance in any trade. You can put a sell stop loss when you buy a stock and you can put a buy stop loss when you sell a stock. At the stop-loss price, the original position gets terminated at a loss and it prevents bigger losses from building up. Stop losses are a must for intraday and short-term traders.

Can an NRI trade-in equity

NRIs are permitted to trade in Indian equity, but they cannot do intraday trading. They are only permitted to trade in equity for delivery. They need to take approval via the bank who acts as the authorized dealer for the NRI but otherwise, the trading process is the same for NRIs as for resident Indians

Frequently Asked Questions

When to use stop loss

Stop loss is an insurance. When you trade in equity markets, you trade with limited capital. You must always work to protect your capital. Hence any trade which is intraday or for short term must be accompanied by stop loss. Always use the stop loss at the time of initiating the trade.

Where can I find stop loss

Stop loss is available on the trading screen itself and you only need to place a counter order as an SL order or as an SL-M order. When you place a regular buy order, you must protect it with a sell SL order. When you sell a stock for intraday or for trading, you must place a buy SL order. Once the SL is triggered, your entire position is triggered and closed for the day and the loss is adjusted to your trading account. You can locate technical levels for stop loss based on technical charts.

Can I use stop loss in intraday?

In the case of intraday, one of the basic rules is never to trade with stop loss. It is the basic discipline needed for you to able to be an intraday trader for a longer period of time. Since you only have one day to close the positions and you cannot afford too much risk, stop losses are essential.