Wondered about all the order types available in your trading platform? Knowing about Stop Loss orders is essential for proper risk control. Here's what a Stop Loss is, and two order types associated with it.
A Stop Loss is an offsetting order which gets you out of a trade. A Stop Loss order helps limit your risk.
Stop Loss Market Order
There are two types of Stop Loss orders: market and limit. Say you buy an S&P 500 E-mini (ES) contract at 1900 and place a stop loss at 1875 (sell stop). If it's a Stop Loss Market order (sell stop) as soon as the price touches 1875 a market order is generated to sell your position. If the price hasn't changed you'll get 1875. If the price has changed in that split second, you get the next best available price. The market order will get you out of the position, but in fast moving or illiquid market conditions it may not always do so at the price you expect. The difference between the order price and where the order actually fills is called "slippage."
Stop Loss Limit Order
If you placed a Stop Loss Limit order (sell stop limit), when the price reaches 1875 a limit order is generated. A limit order only executes at the order price, or better. If the price has already dropped to 1873 by the time your order reaches the market, you'll still be holding your position and an order to get you out will now be sitting at 1875. If the price keeps dropping your loss gets bigger. You only get out of the position if the price moves back up to 1875. The positive is that you only get the price you want. The negative is that you won't always get out of your position when the price is moving quickly against you.
Use a Stop Loss?
Stop Loss orders are recommended as they help control risk. Some traders use Stop Loss Market orders while others use Stop Loss limit orders. As a new trader control your risk as much as possible, using a Stop Loss Market order. In liquid and normal market conditions these orders work well in getting you out of losing trades. Also, to avoid getting a much worse price on your exit than expected, avoid trading around major news events. These can cause large price movements resulting in significant slippage.