{"id":6473,"date":"2025-05-06T17:18:18","date_gmt":"2025-05-06T11:48:18","guid":{"rendered":"https:\/\/www.torusdigital.com\/toruscope\/?p=6473"},"modified":"2025-06-25T10:58:54","modified_gmt":"2025-06-25T05:28:54","slug":"what-is-stop-loss-in-trading","status":"publish","type":"post","link":"https:\/\/www.torusdigital.com\/toruscope\/online-trading\/what-is-stop-loss-in-trading\/","title":{"rendered":"What is Stop Loss in Trading? Meaning, Types & Benefits"},"content":{"rendered":"

In stock trading<\/a><\/strong>, you don\u2019t always have to monitor the market constantly to make buy or sell decisions. Just like you can automate bill payments through your bank with auto-pay, you can also automate your trades using pre-defined instructions called orders. One such essential tool for managing your trades is the <\/span>stop-loss order<\/b>.<\/span><\/p>\n

In this article, we\u2019ll explain <\/span>stop-loss meaning<\/b>, why it\u2019s important, how it works, and how you can set up a <\/span>stop-loss order<\/b> effectively.<\/span><\/p>\n

<\/span>What Is Stop-Loss Trading?\u00a0<\/b><\/span><\/h2>\n

A <\/span>stop-loss order, <\/b>also known as stop order, is when you set up an automated instruction to buy\/sell a specific number of shares of a particular stock only when the actual stock price falls to a certain level, or what is called a \u2018stop-price\u2019. The stop price is decided by the investor, and the order will get triggered only when the stock price reaches the stop price. This helps investors manage risk effectively, especially when the market is volatile and price-sensitive.\u00a0<\/span><\/p>\n

<\/span>How Does a Stop-Loss Order Work In Trading?<\/b><\/span><\/h2>\n

By setting the stop order, you can protect yourself from considerable losses in case the market moves against you. Here’s a step-by-step breakdown of how to set up a <\/span>stop-loss order <\/b>effectively:<\/span><\/p>\n

Step 1: Evaluate Risk:<\/b> To set up a stop order, it is important to evaluate your risk tolerance. While the aim is to earn profits and minimise losses, you need to know the extent to which you\u2019re comfortable risking your investment. If a stock is priced at \u20b9100 per share, you need to decide up to what extent you are okay to incur a loss.<\/span><\/p>\n

Step 2: Set the Limit Price:<\/b> After evaluating your risk tolerance, you need to set the stop price for the stop order to be triggered. You decide on the percentage of risk you\u2019re willing to take and set the price. For example, if the stock price is \u20b9100, and basis your understanding of the market trend, you\u2019re willing to take a risk of up to 10%, then the ideal stop price could be \u20b990.\u00a0\u00a0<\/span><\/p>\n

Step 3: Select the Quantity and Expiry Date:<\/b> Once you\u2019ve set the trigger price, you enter the number of shares you wish to purchase at the pre-defined stock price along with the number of days you want the order to be active.\u00a0<\/span><\/p>\n

After setting up this order, there can be three possible scenarios.\u00a0<\/span><\/p>\n

Scenario 1:<\/b> If the stock price increases, the order does not get triggered, so nothing happens.\u00a0<\/span><\/p>\n

Scenario 2:<\/b> If the stock price stays the same, the order still does not get triggered.\u00a0<\/span><\/p>\n

Scenario 3:<\/b> If the stock price reduces and is equal to or below the stop price, the order gets triggered and changes to a market order where the stocks are purchased as per the instructed amount (or nearest to the stock price) and quantity.\u00a0\u00a0<\/span><\/p>\n

It is important to remember that a stop order doesn\u2019t guarantee that the stock will be sold at the specified stop price. Once the stop order is triggered, it changes to a market order where the stocks can be bought\/sold at the next available market price.\u00a0<\/span><\/p>\n

<\/span>Types of Stop-Loss Order<\/b><\/span><\/h2>\n

Now that you know how <\/span>stop-loss order<\/b> works, let’s take a look at their two different types:<\/span><\/p>\n

<\/span>Fixed Stop-Loss Order<\/b><\/span><\/h3>\n

There can only be one trigger price for this type of stop order. When the actual stock price is equal to or below the stop price, the order gets triggered and changes to a market order and buys\/sells shares immediately.\u00a0<\/span><\/p>\n

For example, assume that you want to purchase shares priced at \u20b9 100 each. You have decided that you don\u2019t wish to incur a loss of more than 10%. So, you fix your stop price at \u20b9 90. Sometimes, you may feel that the stock price may take a longer time to reach the stop price. In such cases, while setting up a fixed <\/span>stop-loss order<\/b>, you can add a time limit. The order will stay active for the time duration you choose.\u00a0<\/span><\/p>\n

This makes the method straightforward and easier to execute, especially for investors who prefer a simple way to manage risks.\u00a0<\/span><\/p>\n

<\/span>Trailing Stop-Loss Order<\/b><\/span><\/h3>\n

This is a flexible option where the trigger price changes as per the actual stock price. It aims at protecting profits and limiting potential losses. Unlike a fixed <\/span>stop-loss order<\/b>, it reduces the need to constantly monitor your investment.<\/span><\/p>\n

To set up this order, first, you need to do the initial setup for a stop order. For example, assume that you want to purchase shares priced at \u20b9 100 each. You have decided that you don\u2019t wish to incur a loss of more than 10%. So, you set up a trailing <\/span>stop-loss order<\/b> at an initial stop price of \u20b9 90 (10% below the actual stock price).\u00a0<\/span><\/p>\n

After setting up this order, there can only be three situations:<\/span><\/p>\n

Situation 1: If the stock price increases to \u20b9 110, the stop price will automatically change to 10% lower than the stock price, which is \u20b9 100. The order will not be triggered.<\/span><\/p>\n

Situation 2: If the stock price decreases to \u20b9 90, the order will be triggered, and a market order will be executed.\u00a0<\/span><\/p>\n

Situation 3: If the stock price continues to increase to \u20b9 130, the stop price will also continue to automatically change as per the initial set-up, i.e. 10% lower than the stock price, which is \u20b9 117, until the order’s expiry date.<\/span><\/p>\n

<\/span>Benefits of Using a Stop-Loss Order<\/b><\/span><\/h2>\n

Here are a few reasons why a <\/span>stop-loss order<\/b> can enhance your trading experience:<\/span><\/p>\n