Definition
Stop-Loss Order
A stop-loss order becomes active and is sent to the market only when the price reaches a specified trigger level, used to limit losses or protect profits on an existing position.
On Indian exchanges, a stop-loss can be a stop-loss limit (SL) order, which becomes a limit order at the trigger, or a stop-loss market (SL-M) order, which becomes a market order. A trader long a stock might place a sell stop below the current price to cap downside if the stock falls.
Stop-loss orders are central to risk management in both discretionary and algorithmic trading. The key risk is a gap: in a sharp move the actual fill can be far worse than the trigger, especially for SL-M orders, which is why traders weigh execution certainty against price control when choosing the type.
Related terms
- Day OrderA day order is valid only for the trading session in which it is placed; if it is not executed by the close, it is automatically cancelled and does not carry over to the next day.
- Good Till Triggered (GTT) OrderA Good Till Triggered order is a broker-side instruction that holds a trade until a specified trigger price is reached, at which point an actual exchange order is placed, valid for an extended period such as a year.
- Limit OrderA limit order specifies the maximum price a buyer will pay or the minimum a seller will accept, executing only at that price or better and resting in the order book until it can be filled.
- Square-offSquare-off is the closing out of an open position by taking an equal and opposite trade, either voluntarily by the trader or automatically by the broker when margins fall short or intraday positions near the cutoff.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.