Stop Loss Strategy

Introduction

A stop-loss is the most important tool in trading. It is a pre-decided price at which you exit a losing trade. Traders who ignore stop-losses usually do not survive long in the market. In this lesson, you will learn where to place a stop-loss and how to trail it to protect profits.

Why You Need a Stop-Loss

Look at how losses grow:

A 50% loss needs a 100% gain just to break even. A stop-loss keeps losses small so recovery stays easy.

Where to Place a Stop-Loss

1. Below Support

If support is Rs 250, place the stop-loss a little below, around Rs 245, not exactly at Rs 250. Many traders place stops exactly at support and get hit by small dips.

2. Below the Reversal Candle

If you bought after a hammer with a low of Rs 482, place the stop-loss just below Rs 482.

3. Below a Moving Average

In an uptrend, if the stock bounced from the 50 DMA at Rs 590, place the stop-loss below it, around Rs 582.

4. Percentage-Based

Some traders use a fixed 3% to 5% stop-loss. It is simple but ignores the chart. Chart-based stops are usually better.

The Golden Rule

Place your stop-loss where the chart proves your trade idea wrong, not where the loss feels comfortable. If that stop is too far away, reduce your quantity instead of moving the stop closer.

Trailing Stop-Loss

As the price moves in your favour, move your stop-loss up to lock in profits.

Example:

• Buy at Rs 400, stop-loss Rs 388.
• Price rises to Rs 415. Move stop-loss to Rs 400 (breakeven).
• Price rises to Rs 430. Move stop-loss to Rs 414 (below the latest higher low).
• Price falls back to Rs 414. You exit with Rs 14 profit per share, instead of giving it all back.

Time-Based Stop

If a swing trade does nothing for 7 to 10 trading days, exit. Your money is stuck and could be used in a better setup.

Gap Risk

Swing traders hold overnight. Bad news can make a stock open far below your stop-loss. Your loss will then be larger than planned. Reduce this risk by:

• Avoiding trades just before results or big events.
• Keeping position sizes small.
• Diversifying across sectors.

Common Mistakes

• Moving the stop-loss lower when the price comes close to it.
• Not placing the stop-loss order and trying to remember it mentally.
• Placing stops at obvious round numbers where many traders place theirs.

On GoPocket

Right after your buy order executes on the GoPocket app, place a Stop-Loss sell order. Since stop-loss orders are valid only for the day, place it again each evening as an AMO while you hold the stock.

Frequently Asked Questions

What if my stop-loss hits and the stock goes back up?

It happens. Accept it. The stop-loss protected you in the cases where the stock kept falling.

Should I use SL or SL-M?

SL-M gives surer execution in fast markets. SL gives price control but may not fill in a sharp fall.

Key Takeaways

• Never trade without a stop-loss.
• Place stops where the chart says you are wrong.
• Trail your stop to protect profits.

Disclaimer: Hypothetical examples for education only.