Stop-loss and risk-reward: Decide your exit before you enter
Where to place a stop-loss, how to size a position from the money you are willing to lose, and why a 2:1 reward-to-risk lets you be wrong half the time.
Know where you’re wrong before you buy
Nobody can stop a trade from losing. What you can control is how much it costs. A stop-loss is the price where you accept your idea was wrong and get out. Put it where the chart proves you wrong, such as just under the last higher low, not at a random 5%.
What to look for
- Risk a small slice: many traders risk only 1–2% of their capital on one idea. With ₹1,00,000, 1% is ₹1,000.
- Position size = money you’re willing to lose ÷ (entry − stop-loss). The stop decides how many shares you buy, not the other way round.
- Reward:risk of 2:1 or better: aim to make at least ₹2 for every ₹1 you risk.
Why 2:1 matters: take 10 trades risking ₹1,000 each, aiming for ₹2,000. Win 4, lose 6: +₹8,000 − ₹6,000 = +₹2,000. You were wrong more than half the time and still came out ahead.
You buy at ₹532 with a stop-loss at ₹507, so each share can lose ₹25. If you’re willing to lose ₹1,000 on this idea, how many shares can you buy?
- 1 share
- 40 shares
- 80 shares
Show the answer
40 shares. Divide the money you’re willing to lose by the loss per share: ₹1,000 ÷ ₹25 = 40 shares. If the stop-loss is hit, you lose 40 × ₹25 = ₹1,000, as planned. Dividing ₹1,000 by the share price only tells you what ₹1,000 buys outright, which is a different question. You’d need about ₹21,280 in your account for this trade.
Plan the exit first
The uptrend pulled back to a higher low near ₹510 and turned up. Buying at ₹532 with a stop at ₹507 risked ₹25 a share, so 40 shares kept the worst case near ₹1,000. The 2:1 target at ₹582 aimed for about ₹2,000. Price climbed towards it.
Never move a stop-loss further away once you’re in a trade. Moving it closer to lock in profit is fine; moving it away is hoping.
Practise Stop-loss and risk-reward, free
Reading about it is step one. In MarketSeekho you see a real NSE chart with the future hidden, call Bull or Bhalu, say why, and get graded on your reasoning, not luck.
Common questions
What is Stop-loss and risk-reward?
Nobody can stop a trade from losing. What you can control is how much it costs. A stop-loss is the price where you accept your idea was wrong and get out. Put it where the chart proves you wrong, such as just under the last higher low, not at a random 5%.
What should I look for with Stop-loss and risk-reward?
Risk a small slice: many traders risk only 1–2% of their capital on one idea. With ₹1,00,000, 1% is ₹1,000. Position size = money you’re willing to lose ÷ (entry − stop-loss). The stop decides how many shares you buy, not the other way round. Reward:risk of 2:1 or better: aim to make at least ₹2 for every ₹1 you risk.
How can I practise reading Stop-loss and risk-reward for free?
MarketSeekho has a free four-page chapter on Stop-loss and risk-reward (learn, answer a question, spot it on a chart, then make a call) and daily real-chart practice graded on your reasoning. No sign-up or money needed.