What is the meaning of stop loss trigger price?
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The exact price at which a stop loss order gets executed is known as stop loss trigger price.
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A stop loss trigger price is the price at which a stop loss order gets executed. Stop-loss orders are used worldwide by traders predominantly to limit their losses. As such orders are relatively easy to understand, even new traders can use them. That said, one should keep in mind that a variant of such orders called “a trailing stop” can also be used to book profits. Hence, such orders are not used only to limit losses, as they can also be employed to earn a profit. Traders should set a stop loss trigger price by considering their risk tolerance level, investment goal, and stock price volatility.
If you are a trader, profits and losses are a part of your life. However, the most astute traders always try to limit their losses. A stop loss order is one of the best ways to limit your losses.
When you buy a stop loss order, your intention mostly is to limit your losses. The exact price at which a stop loss order is activated is called the “stop loss trigger price.” Read this blog because it explains what stop loss trigger price is, how it works, and what are the advantages and limitations of stop loss.
The main objective of a stop-loss order is to limit a trader’s losses on a certain position. Let us take an example to understand this concept. Suppose you buy HDFC Bank’s stock at Rs. 1,700 and you decide that you do not want to bear a loss of more than 10% on this stock. A 10% loss means Rs. 170 in this case.
Therefore, you enter a stop loss order for Rs. 1,530. The moment HDFC Bank’s stock falls below Rs. 1,530, your stop loss order will be executed. By doing this, you will be able to limit your loss to around 10%.
There’s a variation of a stop-loss order that helps traders protect their gains, called “trailing stop.” Let’s take the same example of HDFC Bank. You buy this stock at Rs. 1,700. In a few days, its price jumps to Rs. 2,000. Now, you want to secure profit while minimising your risk. Hence, you buy a trailing stop of Rs. 100 below the market price.
Now, if the stock price starts declining and it breaches the Rs. 1,900 mark, your stop-loss order will be triggered, helping you make a profit of Rs. 200. Under trailing stop, the trigger price moves up or down depending upon the current price; however, the gap between the current price and the trigger price remains constant.
As already discussed, the trigger price is the exact price at which a stop loss order is triggered or executed. Going back to the same example, wherein you buy HDFC Bank’s stock at Rs. 1,700 and decide that you don’t want to incur a higher than 10% loss.
This means once the price breaches the barrier of Rs. 1,530 (1,700 – 170), the stop loss order will be executed. Hence, Rs. 1,530 is the trigger price. This is how it works. You buy HDFC Bank’s stock at Rs. 1,700 and enter a stop loss order for Rs. 1,530.
The moment the price of HDFC Bank’s stock falls below Rs. 1,530, the stop-loss order sends communication to the stock exchange to sell the stock at the prevailing price, thereby limiting your loss to around 10%.
Importance of Stop Loss Trigger Price in Trading (need to add approx. 100 words content in a listicle format)
You set a stop loss trigger price based on a few factors. One, you need to know your risk tolerance. If you can bear high risk, then you can set a stop loss trigger price at a much lower level than the price you bought a stock, and vice versa. Two, the volatility in a stock’s price. Three, your investment goal. These three factors help you decide a stop loss trigger price. Needless to say, one person can set a stop loss trigger price at an altogether different level from another person. Hence, it can vary across traders.
Why Should You Use Stop Loss Trigger Price? (need to add approx. 200 words content in a paragraph format)
The following steps tell you how you can book profits using a stop loss order.
Typically, a stop loss order is used to limit your losses.
However, a variation of this order can also be used to book profits. This variation is called a “trailing stop.”
In the case of a trailing stop order, the trigger price is kept at a lower price than the current price of a stock (not the price at which you had bought it).
Suppose you buy a stock “X” at Rs. 100 and its price increases to Rs. 140. Hence, you want to make a profit.
So, you set a trailing stop at Rs. 130. This means if the price of X starts declining, your order will be executed the moment it crosses below Rs. 130.
This will help you make a profit.
The advantages of using stop loss trigger price are explained below:
Stop loss trigger price helps you limit your losses and also book profits.
It keeps you relatively stress-free because you know the maximum loss you will incur on a position.
It also brings in a degree of discipline in trading. Once you fix a stop loss trigger price, the order will be executed if that price is breached, no matter how much you like the stock.
By bringing in discipline, stop loss orders remove emotions from trading to a large extent.
However, stop loss trigger price also comes with certain disadvantages, which are listed below:
The biggest disadvantage of this strategy is due to premature selling.
Suppose you keep a stop loss at 4%; however, the stock has a history of moving 6% up and down.
In this case, the order is likely to get executed too soon.
You may be fine with your losses getting locked at 4%. However, bear in mind that the stock could have risen rather than fallen by 6%. So, by having this stop loss order, you have given up the possibility of making a profit.
Examples of Stop Loss Trigger Price in Action (need to add approx. 100 words content in a listicle format)
Whether you are new to trading or are a seasoned trader, stop-loss orders can help you big time in limiting your losses and even booking profits. They can be particularly useful in volatile markets when stock prices go up and down crazily. However, keep in mind that you should set a stop loss trigger price wisely by considering your risk tolerance, stock price volatility, and your investment goal. If you don’t set a stop loss trigger price correctly, it may affect you badly. Hence, it’s better to first learn how to set a stop loss trigger price and then use this strategy.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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The exact price at which a stop loss order gets executed is known as stop loss trigger price.
Suppose you buy a stock at Rs. 100 and set a stop loss trigger price at Rs. 95, then the moment the stock price falls below Rs. 95, the order will get executed at the prevailing market price, thereby limiting your losses.
Three types of such orders exist. One, a regular stop loss order under which a stock is sold the moment the stop loss trigger price is breached. Two, a stop limit order under which a stock is sold either at the stop loss trigger price or at a price higher than the trigger price. Third, a trailing stop order under which the trigger price moves up and down based on the current stock price; however, the difference between the current price and the trigger price is kept fixed.
If you set up the trigger price wisely, it can limit your losses or help you book profits. However, if you don’t do it well, it can either result in a lot of losses or prevent you from booking profits.
The right stop loss trigger price depends upon your ultimate investment goal, your level of risk tolerance, and the average volatility in the stock price.
Yes, you can modify or cancel a stop loss trigger price once set. However, the process of doing so may not be the same across brokerage firms. So, you should always ask your broker in terms of how to go about it.
Setting a trigger price that results in the premature execution of a stop loss order is an extremely common mistake that traders make.
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