A Stop loss order is basically a form of exit used to limit the loss in a trade. These orders are expected to hugely benefit day traders in futures trading. Stop loss orders are used only to exit trades and not for entry. These orders limit the loss amount, if any adverse price movements. For ex: If you hold a long position in anticipation of rise in prices, you can protect your money with case of fall in prices. Based on the order types, orders can be classified as stop market and stop limit orders. Stop Market Orders: These orders have stop market as its underlying order type. A stop is placed at a specified price and when the market touches the price, the stop market is activated and executed as a normal market order. Traders determined to exit can use these orders, as market are usually filled however with a possibility of variation in the price expected. Limit Orders: These use stop limit as its underlying type. When the market reaches the specified price, stop orders will be executed as a regular limit order. You must be aware of the probability of your not being filled and you may not exit if the price does not reach the specific level. As stop loss orders are specifically used to exit trades, usually a loss market is recommended to exit and limit your losses. Though, odds of exiting at an alternative price are high, you can avoid the risk of huge losses which may arise if not exited. However, a stop limit can also be beneficial in case you are not making an emergency stop loss. You can choose between discretionary and system trading methods to place stop orders. Discretionary trading method requires you to study market dynamics and place your order at a specific price at which you don't foresee the market trading at. A System trading method incorporates many statistical and mathematical tools to arrive at the price.
Just be careful with overusing stop loss orders. If you set them up and never monitor them you run the risk of automating the opposite of a profitable strategy - that is you will automatically sell when the price is lower and buy when the price is higher.
