You can place a stop loss as well as a limit order together while trading in derivatives such as Futures and Options. To implement this you will have to maintain a sufficient margin for additional orders.
How to use a Stop Loss?
A Stop Loss is critical when it comes to derivatives trading like options and futures. A stop-loss helps you to calculate the total risk in a trade so that you can manage it accordingly. By placing a stop-loss order you not only define your risk but also ensure a healthy target against your SL.
Both stop loss and limit orders give a sense of protection to the investors in 2 ways. In case of stop loss, orders do get executed but there is a price fluctuation that occurs when order is executed. Sell orders are executed at less than a limit price. The difference- prices keep dropping at an enormous rate.
Stop limit on the other hand will give a guaranteed price limit but here the trade might or might not be executed. The issue here is also that an investor will suffer losses if he order is not executed before the market prices drop even below the limit price.
By having a target and a stop-loss, your trading activities can get more controlled and much more efficient. But the question arises, “Can I use both together?”
Can you put your Stop loss and Target order together?
Yes! You can place two different orders as an SL and an Exit order.
However, these orders will be considered as two separate buying/selling orders. Hence, you will require to maintain a sufficient margin for both of them.
Let’s take a situation where you go long (buy) on a Nifty Futures contract and decide to place a stop loss 50 points away from your buying price. Correspondingly, you also want to place a target of 100 points to exit the trade.
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Let’s assume you have a total of Rs 2 Lakh in your account. And to purchase a Futures contract you require Rs 1 Lakh. To place a sole stop-loss order, you would not require any additional margin because the order is not to take another position but to exit the trade. Whereas if you want to place an SL order as well as a limit order, you would require an additional Rs 1 Lakh.
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As you have a sufficient balance in your account to cover both orders, you will be able to place your SL and Exit order.
But if your account had Rs 1.5 lakh instead of Rs 2 Lakh, you would not be able to place both orders simultaneously.
Therefore, in order to place both these orders, you should maintain sufficient margin (funds) in your account to cover the costs of both orders.
The logic behind this is, if either of your orders (SL or Limit) order gets executed, then the other order will remain in the system. This can result in another order if you don’t eliminate it manually. Hence to facilitate such an order, it is critical to maintain sufficient funds for additional orders.
Another way around
On multiple occasions, you might not have sufficient margin for additional orders. In this case, you can place either a Stop Loss order or an Exit (Limit) order according to your preference. You can modify the orders accordingly. If your position goes against you, then you can place the Stop loss and if it goes as planned, you can withdraw the SL order and place the limit Exit order.