Getting Familiar with Stoploss

Apurva Sheth
By now most of you know what a stoploss is and how important it is for a trader. You also know the stoploss mechanism for a stock after you have bought it. So now I want to tell you how to decide where a stoploss should be placed.

There are many ways in which one can decide where or at what levels to place a stoploss. I will talk about few of them today. Let me tell you these are not the only methods that are being used. There are many more and as we move ahead in this journey and learn new concepts I will also show you how they can be used to decide what an optimum stoploss level should be.

So let's just start with it.

  1. Placing a stoploss around major supports/resistance level
    This is one of the most obvious methods to decide an ideal stoploss level. I spoke to you about support and resistance levels earlier.

    Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. So if you had bought a stock and if it breaches below this level you would want to exit the stock simply because there isn't sufficient demand to absorb the supply. No demand is a good enough reason to push the price further down and you wouldn't want to hold such stock anymore, right?

    Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. Similarly, if you had sold short a stock and if it breaches above this level you would want to square-off your short positions because the buyers have been very enthusiastic and overwhelmed the sellers by buying the stock at a higher level.

    The real challenge lies in identifying support and resistance levels correctly. Many a times it happens that you place a stoploss at an important support level and placed your stops accordingly, the stock breaches it and takes you out of your position and zap it goes back up again. I'm sure many of you have been through this situation and some of you might have even stopped using stoplosses altogether because of the same reason. But let me tell you there is no magic solution for it. Apart from analyzing your levels properly. You cannot do anything more. Stoplosses are a part and parcel of trading. You will have to learn to handle if you want to sustain and grow your trading account. A lesson which I have learned over a period of time is having a stop and hitting it is better than not having it at all and holding on to losing position.

  2. Fix % method
    Here one places a stoploss at a fix percentage below (above) the entry price depending on whether you are long or (short). For example one may have identified a stock with a potential target of 10%. Now depending on the risk reward ratio one would like to maintain on his trades one can keep a suitable stoploss a fixed percentage below (above) his entry price. So if one were to follow a risk reward ratio of 1:2 in the above example one would keep the stoploss 5% away from the entry price.

    I wouldn't prefer this method much as this doesn't consider factors like volatility, supply and demand zones into account. Nonetheless many traders use it for its sheer simplicity.

  3. High/Low as Stoploss
    This strategy is mostly used by momentum traders who want to be with the stock until its trending well. A trader will decide the timeframe depending on his time horizon he is trading with. So one can keep a 5/10/20 day high/low as stoploss for their positions and hold on to the stock until its trending. This is one of the methods used by many traders when they want to trail their stop along with the price as it moves. So a trader will shift his stoploss very frequently if the stock is in a strong uptrend/downtrend and will exit the stock the moment it starts trading sideways for a while as sooner or later it will hit either of the last few days high or lows.

  4. Moving Average as a Stoploss
    The basic logic is the same of using high/low as stoploss i.e. to stay with the stock until its trending. A stoploss based on moving average will move only gradually as against a stoploss based on high/low levels. This is because a moving average smoothens the data while there can be a spike on a single day may be higher or lower which can move the stoploss abruptly if one were to use highs/lows as stoploss.

    Moving Average is also one of the methods to trail stoplosses along with the price. So as and when the moving average shifts the SL shifts along with it. It's quite a simple technique but may become a bit difficult to implement for those who do not have access to price data regularly. Here again the parameter for the moving average will depend on the time frame one is trading in.
So, these are some of the most simple and basic methods used by traders to decide a stoploss level. As we move ahead I will show some other advanced techniques of deciding the stoploss level as well.

How do you decide a stoploss level on your trades? Share your views in the Club or share your comments here.

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11 Responses to "Getting Familiar with Stoploss"
Varadarajan Kasturi
11 Nov, 2017
Dear Sir, I am new to this trading, and would like to know when to put the Stop Loss for a scrip I buy on your recommendation. Is it when you buy the stock or at the trendline of the stock declining on the date of purchase. Pl explain Thanks and Regards,Like 
22 Mar, 2015
Dear Sir, I am new for trading. However, I do option trading based on the tips provided by some of my friends.The tips discussed here are very much useful for me. These are all most valuable in my opinion.Pl provide some more tips so that traders like me will be benefitted.Like 
20 Mar, 2015
Apurva Sheth has explained S/L principles in very simple and understandable manner. He has correctly said that SL put by many of us gets hit and then the stock takes uturn. He has rightly emphasized that putting a stop loss and hitting it is better than not putting it at all. Because if this is not done, one has to keep the stock in portfolio for an unpredictable period. I have also experienced that if a stock is recommended at X with a target of Y and SL at Z and if the difference between X and Y is less than X and Z, better not go for that stock. Because likely profit is less than likely loss.Like 
20 Mar, 2015
Please give linkage to other 4 variables in the article like you gave for the first one. thanks.Like 
20 Mar, 2015
Very useful tips. one may note that there is a floor price fixed for each stock each day by the exchange. Stop loss value can not be less than that. Is it not?Like 
abhi kumar
19 Mar, 2015
i follow the method of support & resistance method which will really help everyone. Useful article . id you can explain with some charts , that will help to the newcomers also.Like 
Ashok Rustagi
19 Mar, 2015
In swing trader proper stoploss is defined and given and daily review is also written. Can't we follow the same practice at least to review the position on daily basis instead of waiting till Monday. This has resulted into loss of certain position which were well in profit during the week at certain points of time. Hope Mr Asad will consider this point.Like 
K.P.Narendrakumaran Nair
19 Mar, 2015
Mr.Apurva, Very valuable tips on stoploss indeed. No body else will release such secrets of trading so easily. I appreciate your dedication to serve the needy.Like 
Raveendran Cheekkoli
18 Mar, 2015
Dear Sir, Do I have to apply stop loss on all the shares I hold in my portfolio before the trading day begins and on a daily basis? Also do I have to sell the shares for applying the stop loss? I am a retail investor. With thanks.Like 
18 Mar, 2015
Hi Apurva, Details on different types of SL is very useful. I usually decide the SL as Fix % (based on R/R) and around major support levels. As it is very obvious for all to know where usually one places the SL at major support levels professional trades/FI's try to hunt SL (shakeout price action) and that is where it is noticed trend continuation after hitting SL.Like (2)
18 Mar, 2015
very valuable tips on stoplossLike 
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