Stop-loss
A stop-loss is a price decided in advance at which you will exit a trade to stop a loss from growing larger.
What it is
Before you buy, you decide the price at which your reason for buying is proven wrong. That price is your stop-loss. If the share falls to it, you sell and accept a small, known loss instead of hoping and risking a big one.
Most brokers let you place a stop-loss order with the exchange. It becomes an active order only when the price reaches your trigger. A stop-loss limit order sells at your limit price or better, so it may not fill in a fast fall. A stop-loss market order sells at the best available price once triggered, so it fills more reliably but possibly at a worse price.
Where to place it
Place it where the trade idea fails, not at a random round number. Common choices are just below a support level, just below a moving average the trade depends on, or a multiple of ATR below the entry.
A trailing stop-loss moves up as the price rises, locking in part of the gain. Traders often trail a stop under a rising moving average or the Supertrend line.
Limits
A stop-loss is not a guarantee. If a share opens far below your stop after bad news, or is stuck at its lower circuit, you may exit at a much worse price or not at all.
Stops that are too tight get hit by normal daily noise. Stops that are too wide make each loss large. Matching the stop to the share’s volatility, and the position size to the stop, solves most of this.
Placing a stop under support
You buy a share at ₹260 because it bounced from support near ₹250. You place a stop-loss at ₹246, just under that support. If it fails, you lose ₹14 a share. With 100 shares, your planned loss is ₹1,400. If the share instead rises to ₹300, you might trail the stop up to ₹280.
Common mistakes
- Not placing a stop at all and hoping the price comes back.
- Moving the stop lower when the price gets close to it.
- Placing stops so tight that normal daily moves hit them.
- Assuming a stop-loss guarantees the exit price during gaps.
You buy at ₹500 with a stop at ₹480. The price falls to ₹482. What does a disciplined trader do?
- Leave the stop at ₹480 and accept the exit if it is hit
- Move the stop to ₹460 to give it more room
- Cancel the stop and buy more
Show the answer
Leave the stop at ₹480 and accept the exit if it is hit. The stop was set where the idea fails. Moving it lower when the price gets close turns a small planned loss into a bigger unplanned one.
Common questions
What is a stop-loss with an example?
If you buy at ₹200 and decide you will exit if it falls to ₹190, ₹190 is your stop-loss. Your planned loss is ₹10 per share.
What is the difference between stop-loss limit and stop-loss market?
Both trigger at your chosen price. A limit order then sells only at your limit or better and may not fill; a market order sells at the best available price and usually fills.
How much stop-loss should I keep?
There is no fixed percentage that suits every share. Place it where your reason for the trade fails and adjust your position size so the loss is small compared with your capital.
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