When a trade occurs at a distant price from the current market price then they are called as freak trades. Generally, these happen due to shallow market depth, i.e., low liquidity or when your trade is overlapping with a huge market order.
Whenever you are placing market order, a natural risk of losing money is always present because of a freak trade. In contrast, a limit order assures price execution at a definite price rate to evade freak trades, however, there is no promise of the order fill itself.
Thankfully, there is a solution to enjoy the advantages of both orders types, i.e., the price protection of a limit order so you don’t have to worry about freak trade and at the same time have the order fill promise of a market order.
Using Stop Loss Limit order as Stop Loss Market orders – When you agree on a trigger price at which a market or limit order is placed it is known as a stop loss order. These trigger prices are not placed in broker systems but on the exchange.
You can use the stop loss limit order as a stop loss market order the same way a limit order can be used as a market order. For this, you will need to identify a limit price that is greater or less than the trigger price, something that entirely depends on your decision to buy or sell.
Let’s understand this with an example.
Stock – XYZ
Position – Short, Short price – Rs. 300, LTP – Rs. 295, SL Trigger – Rs. 305, SL Limit – Rs 315
The SL limit buy price of Rs. 315 will get placed when the market price is equivalent to the stop loss trigger price, i.e., Rs.305. However, Rs.315 is much higher than the current market rate of Rs. 305, the limit price will function as a market order, and will get filled between Rs. 305 and Rs. 315.
If a situation arises where another huge market order overlaps with your order, the limit price at Rs. 315 will protect you from a freak trade. Likewise, placing a SL sell limit order with a price that is lower than the current market price, your stop loss limit order will act as a stop loss market order.