A stop-loss order is a specific order type. It is a technique designed to limit expected losses. Investors use it to protect their capital by setting a specific "stop" price. When the market reaches this stop price, the order triggers and gets converted into a market order. Then, it sells the security at the next available price.

It allows investors to smartly manage risk without needing to monitor their positions constantly. This tool is especially useful for investors who want to avoid emotional decision-making and stick to a disciplined trading strategy.

In this article, let’s understand the stop-loss order meaning in detail and learn how you can place it following some easy steps.

• Stop-loss orders automatically sell a stock when the price falls below a pre-determined level.
• It helps traders limit losses without constantly monitoring the market.
• Avoid setting stop-losses too tight, as it can lead to premature or ineffective triggers.

A stop-loss order is placed to automatically sell a security when its price falls to a specific level set by the investor. In simple terms, it protects against big losses by triggering a sale if the market moves unfavourably. For example:

• Say you buy a stock at Rs. 100 and set a stop-loss at Rs. 90.
• Now, the stock will be sold if it drops to Rs. 90.
• This limits your loss to Rs. 10 per share.

This order is an important risk management tool. It removes emotions from trading decisions and prevents panic-selling. For beginners, a stop-loss order is particularly useful, as it provides a safety net and allows them to learn.

There are multiple types of stop-loss orders, with each offering different levels of protection. Let’s check them out:

1. Sell-stop orders

A sell-stop order protects long positions. It sells a stock if its price falls below a set level. For example, if you bought a stock at Rs. 30 and it rises to Rs. 45, you may set a sell-stop at Rs. 41 to lock in a Rs. 10 gain. Now, if the price drops to Rs. 41, it triggers a sale at the best available price. This protects you from further losses. However, be aware that the final price may vary depending on the market.

2. Buy-stop orders

Buy-stop orders work for short positions. You place an order to buy a stock if the price rises to a certain level. For example, if you short a stock at Rs. 50, expecting the price to drop, you can set a buy-stop at Rs. 55. If the stock rises to Rs. 55, your order will trigger. This strategy helps you avoid unlimited risk if the stock price rises unexpectedly.

3. Stop-limit orders

A stop-limit order is a combination of both stop and limit orders. You set a stop price that triggers the order and a limit price that specifies the minimum or maximum you are willing to accept.

For example, if a stock falls to Rs. 47 (stop), your sell order will trigger but will only execute at Rs. 45 or better. If the stock falls too quickly, your order may not be filled until the price rises again to Rs. 45.

4. Buy-stop-limit orders

A buy-stop-limit order is used in “short sales”. It triggers a buy if the stock price rises to a certain level, but the purchase will only occur at a specified limit price or better. For example, say you short a stock at Rs. 60, expecting it to drop. To protect losses, you set a buy-stop-limit order at Rs. 65 with a limit of Rs. 64. Now, if the price rises to Rs. 65, your buy triggers, but the purchase only completes if the stock reaches Rs. 64.

To easily set a stop-loss order while trading, follow these simple steps:

• Step I: Access your online trading platform using your username and password.
• Step II: Go to your portfolio or search for the stock or asset for which you want to set a stop-loss.
• Step III: Look for the option to create a new order and then select "stop-loss" as the type.
• Step IV: Set the “stop price”. This is the price at which you want to trigger the sale if the stock price drops.
• Step V: Choose if the stop-loss will remain for the day, a few days, or until manually cancelled.
• Step VI: Double-check all details and confirm the order.
• Step VII: Keep an eye on your stop-loss and make suitable adjustments based on market conditions.

Careful planning is necessary while placing a stop-loss order. Below are some errors that can significantly affect your trading success:

• Setting stop-loss too tight
  Avoid placing the stop-loss too close to the current price. That’s because it can trigger prematurely due to normal market fluctuations and lead to unnecessary exits.
• Ignoring market volatility
  In highly volatile markets, placing stop-loss orders without considering price swings can lead to frequent triggers.
• Using the same stop-loss for all stocks
  Different stocks have different volatility levels. Applying the same stop-loss for every stock is not appropriate.