Before moving ahead with the discussion, let’s first clarify the concept of Trigger Price.
In simple terms, trigger price is the price at which the exchange server activates the buy and sell order and makes it ready for execution.
Now stop loss is one of the Zerodha order types that allow you to mitigate your risk involved in trading. Here you can enter the value you wish to exit the trade in case the market trend moves in the direction opposite to yours analysis.
The most important thing here is to define and grab the understanding of how to calculate stop loss. With the right understanding, you would not only minimize the losses but also be able to book the profit at the right value.
Zerodha Stop Loss order is of two types:
SL Order (Stop-Loss Limit): This includes the price plus the trigger price.
SL-M Order (Stop-Loss Market): This order includes only the trigger price.
Let make the concept of stop-loss order clearer with an example.
Let’s assume that you buy a stock of Rs 100, you can set a stop loss at 95. This means that when the value of stock reaches 95, the system sells your stock automatically.
Apart from the type of stop-loss order, Zerodha stop-loss market covers two different cases.
Case 1:If you are in the buy position, then you keep the sell SL.
Read an example to give you the clarity of the concept.
So, let’s say, you buy a position at 100 and place an SL at 95.
Then SL-M order Type will include the SL-M order with trigger price 95. So when the price of the stock or commodity reaches 95 then the sell order will be forwarded to the exchange (NSE, BSE) where it will square off at the market price.
In SL-Order Type: This order type is placed by mentioning the price and trigger price. Since it involves the price to be triggered therefore the trigger prices should be more or equal to price. This will give you the range of Stop Loss.
So, if you keep the range of Rs 0.10
Trigger price Rs 95
As the price reaches 95 the sell order gets triggered and the order is sent to the exchange (NSE, BSE). The exchange squared off the order at the next available bid or at Rs 94.90.
In short, the SL will be executed either at Rs 96 or 94.95 but will not go below 94.90.
Although it prevents investors from facing loss there are a few disadvantages associated with the same especially when the market falls steeply then there are chances of facing much higher losses.
Case 2: If you are in the sell position, then you will keep the buy SL
Consider the example when the sell position is at 100 and you are willing to place an SL at 105.
Then in case of,
SL-M order type the order get trigger at Rs 105 and the buy market order is sent to the exchange. This will be followed by the square-off of your position at the market price.
In SL order type buy SL order is placed with price and trigger price. The order gets triggered first giving you the range of the stop-loss.
Again, let assume the range of order to be Rs 0.10
Trigger price Rs 105
Price Rs 105.10.
As the price gets triggered at 105, the buy limit is sent to the exchange. There the order gets squared off at the price less than 105.10.
Thus, your order will be executed either at 105.05 of 104 but not above 105.10.
Zerodha Stop Loss and Target
Many investors wonder whether they can place a target and stop-loss order simultaneously to open a Futures position in Zerodha.
Then here is the best answer for all those looking for it.
It is possible to place both the order together but make sure you have a positive balance in your account.
So, you can place two orders of opposite transaction types in the same instrument if you do not require margin for the second order.
Order getting executed primarily will be considered as the exit order. This blocks the margin for the open position that would be about to release.
The released margin can be utilized with the free cash in the trading account.
Before placing both the order simultaneously make sure that you cancel the Stop loss order when your target order gets hit and vice versa.