Zerodha CEO explains how to use stop loss orders to avoid losing money on odd trades

To protect against impact costs due to a freak trade, the brokerage suggested that investors should use limit orders instead of market, and SL instead of SL-M. One can use LIMIT and SL in a way to deliver instant execution while providing market protection.

However, Kamath said in his tweet that most brokerages around the world do not support SLMs and also place market orders for options due to high volatility and hence high impact cost risk.

A trade that is executed at a price far away from the current market price is called a ‘freak trade’. Odd trading occurs due to the shallow depth of the market (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 an odd trade, zerodha Explained in its support page.

However, the brokerage explained that a limit order guarantees price execution at a specified price (avoiding eccentric trading), but there is no guarantee that the order will be filled. “But there is a way to have the best of both order types, i.e. to enjoy the price protection of a limit order (so no freak trading) and enjoy the order fill guarantee of a market order – using a stoploss limit order with a stoploss market. Do as order,’ it said.

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

Just as a limit order can be used as a market order, you can use an SL-L (stop loss limit) order as a SL-M (stop loss market) order. To do this, you need to ensure that 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 an SL sell limit order with a price lower than the current market price, your SL limit order will act as an SL market order.