Updated: Sep 9, 2021
One small mistake, and you can lose millions in one trade.
In August and September month (2021), many traders lost a few lakhs because they used the 'SL-M' order type while placing their options trades.
Their trades were executed with an insane amount of slippage and it caused big damage both financially and emotionally.
Everyone called it ‘Freak Trades’ and moved on. But the people who took such a big loss need more time to recover (both financially and emotionally).
Hence, it is better to have complete clarity on the order types.
Any trade consists of at least two orders: one to get into the trade and another to exit the trade.
An order is either a buy order or a sell order.
If a trade is entered with a Buy order, it will be exited with a Sell order (‘Long’ trades).
If a trade is entered with a Sell order, it will be exited with a Buy order (‘Short’ trades).
Suppose a trader expects the price of a stock will go up. In that case, his trade will consist of one buy order to enter the trade and a sell order to exit the trade (hopefully at a profit after the increase in price).
It is called the ‘Long’ trading concept.
Suppose a trader expects the price of a stock will go down. In that case, his trade will consist of one sell order to enter the trade and a buy order to exit the trade (hopefully at a profit after the decrease in price).
It is called the ‘Short’ trading concept.
Below are important order types available in trading:
Market order (MKT)
Stop Loss order (SL)
Limit order (LMT)
Market Order (MKT)
It is the simplest order type. Your order (buy or sell) will be executed at the current market price. In an active market, market orders will always get filled, but not necessarily at the exact mentioned price as it depends on the bid/ask price available at the moment.
For example, Suppose the Nifty future price is 10100 and keeps a Buy order as ‘MKT’ order type. In that case, your buy order will be executed at 10100 (or to the nearest value with 1-2 points difference).
Similarly, suppose you keep a Sell order as ‘MKT’ order type. In that case, your sell order will be executed at 10100 (or to the nearest value with 1-2 points difference).
Stop Loss Order (SL-L & SL-M)
Stop-loss order is similar to a market order. But it will be executed only if the price reaches a certain price level.
This order can be used in two ways:
To enter a new trade with a buy/sell order at specific levels. For example, the current market price of Auro Pharma is 736, and you want to buy this script only at 740. Then you have to place a Buy SL-L or SL-M order at 740. This order will be executed only when the price reaches 740.
To reduce the risk of your live trades in case of market fluctuations. For example, assume you have bought some Reliance shares at 1610 levels and want to book a loss if the price goes below 1600. One way is by watching the price changes continuously, and you can sell with an order type ‘MKT’ when the price falls back to 1600. Another way is to keep a Sell SL-L or SL-M order at 1600 and then no need to watch the price changes continuously. This order will be executed when the price falls to 1600 levels.
Usually, we can see two variants of Stop Loss order: 1) SL-L order and 2) SL-M order
SL-L order: The current market price of Auropharma is 736, and you want to buy only at 740.
You have to select the order type as ‘SL’ in Zerodha (and SL-L with other brokers) and then enter ‘740’ at a price, and you have to enter the nearest value to the price in the ‘Trigger price’ field. In this example, I have entered 739.5, close to 740, and this order will be triggered when the price reaches 739.5.
It is not good to use this order in the scripts, which show less volume or fewer participants. Because the market may not trade at your trigger price level, and there are some chances that your trade may not be executed.
SL-M order: For the same Auropharma example, select the order type as ‘SL-M,’ and you don’t have to enter anything in the price field. Just enter your level (in this case, 740) in the ‘Trigger price’ field. Your order will be executed when the price reaches 740 or above.
How to Avoid Huge Slippage Using SL-L order?
There are advantages and disadvantages with both SL-L and SL-M orders.
In SL-M order, execution of the mentioned quantity is guaranteed, but not the price level (it will be executed at any available price).
In SL-L order, execution price is guaranteed, but it may not fill the mentioned position size or it may not execute the order itself (when there is opposite order in the mentioned price levels).
To avoid FREAK TRADES, it is better to use SL-L order. But one has to watch the execution of SL-L orders carefully as there is a chance of not filling the complete quantity.
Let us say as part of your options trading strategy, you want to buy Banknifty 36800 PE which is trading around 135-140.
Then instead of using the 'MKT' order, one can use the 'Limit' order as shown below:
If your requirement is to buy above a certain price level, then instead of using SL-M, use SL-L order type as shown below:
Caution - Please note a Limit order or SL-L order gives a guarantee about the price of the execution, but not the quantity.
Hence, there is a possibility of trades not getting executed at your price levels (or it may fill only partial quantity). Hence, it is the traders' responsibility to verify the order after the execution.
Limit Order (LMT)
The idea of the Limit order is to pass the benefit to the trader. These orders are used to buy or sell a script at a specific price (or at the available better price).
For example, suppose you place a limit buy order at 100. The order will only be executed at 100 or better (in this case, a better price would be below 100).
Similarly, suppose you place a limit sell order with a price of 100. In that case, the order will only be executed at 100 or better (in this case, a better price would be above 100).
It is beneficial for beginners to book the profit for their trades. For example, assume you have bought some Bharti Airtel shares at 380, and your target is 400.
Then you place a sell order as order type ‘LMT’ and with a value of 400 at ‘Price.’ This order will be executed only when the price trades at (or above) 400. In this way, this will guarantee the profit if the price again trades below 400.
Usually, pro-traders use this order to buy/sell their huge position within some range.
They cannot use the ‘MKT’ order type for their massive position. It might result in a significant slippage, which increases the risk.
Similarly, we have a few more different order types like Basket order, bracket order, cover order, GTC order, etc. Only pro traders or fund managers require these order types, and hence these order types are not covered in this article.
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