Home / Markets / Stock Markets /  Zerodha CEO shares how to use stop loss orders to avoid losing money on freak trades
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When trading it is important to cover all risks that can be controlled. Starting September 27, Stoploss market (SL-M) orders won't be available on the National Stock Exchange (NSE) for options, and therefore, online stock brokerage firm Zerodha's founder and CEO Nithin Kamath shared how investors can use an SL (stop loss) order like SL-M order.

To protect from impact cost due to a freak trade, the brokerage suggested that investors should use limit order instead of Market, & SL instead of SL-M. One can use Limit & SL in a way to give instant execution while also providing market protection.

Though, Kamath in his tweet said that most brokerages around the world don't support SLM and also market orders for options due to high volatility & hence high impact cost risk.

A trade that gets executed at a far away price from the current market price is called a 'freak trade'. Freak trade occurs owing to a shallow market depth (low liquidity). A freak trade can also occur if your trade coincides with a large market order. When you place a market order, there is always an inherent risk of losing money due to a freak trade, Zerodha explained in its support page.

However, the brokerage went on to explain that a limit order guarantees price execution at a specified price (avoids freak trade), but there is no guarantee of the order fill itself. “But there is a way to have the best of both order types, i.e to enjoy the price protection of a limit order (hence no freak trade) and also enjoy the order fill guarantee of a market order - Use Stoploss limit order as Stoploss market orders,'' it said.

A Stoploss order is a type of order where you specify a trigger price at which either a limit order or market order is placed. These triggers are placed on the exchange and not within the broker systems.

Similar to how a limit order can be used as a market order, you can also use the SL - L (stop loss limit) order as an SL-M (stop loss market) order. To do this, you need to ensure you place a limit price, higher or lower than the trigger price depending on whether you intend to buy or sell.

Similarly, if you place a SL sell limit order with a price below the current market price, your SL limit order will act as an SL market order.


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