4.13What is a stop-loss order?
1What is it?
A stop-loss (SL) order automatically sells (or buys) when the price reaches a trigger price, to limit losses. An SL-Limit order has both a trigger price and a limit price.
2Why does it exist?
You can’t watch the screen all day. A stop-loss is a safety net that gets you out if a trade goes wrong.
3Stock market example
You bought at ₹500. You set trigger ₹470, limit ₹468. If the price falls to ₹470, a limit sell at ₹468 is sent. If the price crashes straight past ₹468 (a gap), your order may not fill.
4Diagram
5Calculation
Max planned loss = (Buy price − Stop price) × Quantity
- (₹500 − ₹470) × 20 shares = ₹600
You planned to risk about ₹600 on this trade.
6Advantages
- ✓Limits losses automatically.
- ✓Removes emotion.
7Risks
- SL-Limit may not fill in a fast fall.
- Stops too close get hit by normal noise.
8Quick revision
- Trigger activates the order.
- SL-Limit has trigger + limit price.
- Gaps can skip your stop.
9Knowledge check
Q1. Bought at ₹200, stop at ₹190, 50 shares. Planned max loss?Show answer
₹500.
Q2. What is the trigger price?Show answer
The price that activates the stop order.
Q3. Why might an SL-Limit not fill?Show answer
The price falls past the limit before it can execute.