Confusion regarding correct usage of Stop Loss

General
1

Hi,

I am trying to understand the correct usage of Stop Loss when Buying and Selling shares. Please consider the following scenarios and let me know the correct Method numbers in my approach.

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PROCEDURE TO BUY A STOCK & SELL IT LATER
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Let's take a fresh transaction. I want to BUY 50 shares of the company ABC @ 100 Rs. and I want to be able to sell it later @ 110 Rs. and I want to stop my losses at @ 95 Rs. I have two methods for this. They are the following:

METHOD 1:

1. I will place a Buy Order with the following info:

Product Code: MIS
Buy / Sell: BUY
Price Type: SL-L
Qty: 50
Price: 100
Trigger Price: 95

2. I will now Submit the above order.

Now when the order completes, I am expecting that my order will be filled and automatically the Trigger Price @ 95 will be triggered if the price of the stock hits Rs. 95 or falls below it and the shares will be sold from my account. If I wanted to sell it later at Rs. 110, I will create a new sell order with Limit price of Rs. 110. Is this method correct?

METHOD 2:

1. I will place a Buy Order with the following info:

Product Code: MIS
Buy / Sell: BUY
Price Type: LIMIT
Qty: 50
Price: 100

2. I will now Submit the above order and wait for it to complete.

3. Once my order Completes in the above step, I will then create a new Sell Order with the following info:

Product Code: MIS
Buy / Sell: SELL
Price Type: SL-L
Qty: 50
Price: 110
Trigger Price: 95

4. I will now Submit the above order.

Now I am expecting that the Sell order completes either when the price hits my price of Rs. 110 or it will be sold automatically at Rs. 95, as per the market fluctuations, thereby realizing my profit or loss respectively. Is this method correct?

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PROCEDURE TO SHORT A STOCK & BUY IT BACK LATER
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Let's take a fresh transaction. I want to SELL 75 shares of the company XYZ @ 150 Rs. and I want to be able to BUY it later @ 120 Rs. and I want to stop my losses at @ 160 Rs. I have two methods for this. They are the following:

METHOD 3:

1. I will place a Sell Order with the following info:

Product Code: MIS
Buy / Sell: SELL
Price Type: SL-L
Qty: 75
Price: 150
Trigger Price: 160

2. I will now Submit the above order.

Now when the order completes, I am expecting that my order will be filled @ 150 Rs. and automatically the Trigger Price @ 160 will be triggered if the price of the stock hits Rs.160 or rises above it and the stocks will be automatically bought for me. Is this method correct?

METHOD 4:

1. I will place a SELL Order with the following info:

Product Code: MIS
Buy / Sell: SELL
Price Type: LIMIT
Qty: 75
Price: 150

2. I will now Submit the above order and wait for it to complete.

3. Once my order Completes in the above step, I will then create a new BUY Order with the following info:

Product Code: MIS
Buy / Sell: BUY
Price Type: SL-L
Qty: 75
Price: 120
Trigger Price: 160

4. I will now Submit the above order.

Now I am expecting that the Buy order completes either when the price hits my price of Rs. 120 or it will be sold automatically at Rs. 160, as per the market fluctuations, thereby realizing my profit or loss respectively. Is this method correct?

So to summarize, here are my questions in a nutshell:

For BUY transactions, which method is correct? Method 1 or Method 2 ?

For SELL transactions, which method is correct? Method 3 or Method 4 ?

All the responses are appreciated.

2

All the methods are wrong. 

  1. Buy limit at 100
  2. Wait for it to execute
  3. Place SL - sell with trigger at 95
  4. Place limit sell wih price as 110
  5. if either 3 or 4 executes, cancel the other. 

Just the opposite in case of shorting. 

Check this post to better understand stoploss orders: http://zerodha.com/z-connect/tradezerodha/zerodha-trader-software-version/stop-loss-orders-limit-market

3

Thanks a ton Nithin, for your clarification. Actually, I have gone through the link that you provided and as I still had my questions, I posted this question. So, is it really necessary to place two separate Sell orders instead of just one and manually cancel the other when one of them executes? I am afraid that this might need me to constantly monitor and cancel the other one or I may end up shortselling stocks and get into deeper trouble. For example, if I am away for lunch and my stop loss is hit (step 3) and by the time I return and my target price is reached (step 4) , that would mean I have shorted the stock and I will be obligated to buy back. Even worse if the stock hits its upper circuit, I am sure to be dragged to the auction (this happened to me just recently) and it will be lot of trouble to deal with, as I have to pay the penalty. Is there a way we can cancel 3 or 4 as soon as one of them executes? Please note that I use the Web trader.
I tried to combine both the Price & Trigger Price in one of my latest sell transactions. I chose SL-L, entered Price as 110 and Trigger Price as 95. But when I try to submit the order, I see this error message: “Trigger cannot be lesser or equal to Limit Price”. Kindly clarify what I am doing wrong here.
I really appreciate your responses and your interest in clarification of the issues.

4

Can’t this be done in 1 order by using Bracket Order?
By doing-
MIS
LIMIT
QTY - 50
PRICE - 100
STOPLOSS - 5
TARGET - 10

Isn’t this the equivalent of buying the stock first @ 100, and after completion of buy order, stop loss being activated @ 95 and Sell Order also being activated @ 110. And whichever gets executed first, other one is autocancelled.

Is this right??

5

Yes it is equivalent. But if you want one of the exit orders to auto cancel, you need to use bracket orders.

1 Like
6

For intraday trades, I always use BO or CO. Benefits are:

  1. No need to manually enter exit orders.
  2. No need to monitor the trade. As you already have given target and SL. Execute and forget it for the day.
  3. Get more margin than mis order. If you use proper money management and risk management then this order type is best choice for intraday orders