Placing stop-losses

In simple terms

A stop-loss order turns a plan's invalidation point into an instruction: if the price reaches this level, sell. The stop-loss orders lesson explains how the orders work. This lesson is about where to put them.

There are two common approaches, structure-based and volatility-based, and a common trap: believing that a tighter stop always means less risk.

Structure-based stops

A structure-based stop sits where the chart says the idea is wrong:

• for a trade based on support holding, just below the support zone;
• for a breakout, back inside the range the price broke out of;
• for an uptrend, below the most recent swing low.

Because many traders watch the same obvious levels, and stop orders cluster just beyond them, place the stop with a buffer beyond the level, not exactly on it, to reduce the chance of being caught by a brief poke through, as the false breakouts lesson describes.

Volatility-based stops

A volatility-based stop is set a multiple of the average true range away from the entry or from a recent extreme:

Common multiples are between 1.5 and 3. A larger multiple gives more room for noise.

Too tight or too wide

Too tight: a stop inside the share's normal daily movement will often be triggered by noise. Each small loss feels harmless, but many of them, plus costs, add up, and the trader is repeatedly stopped out just before the move they expected.

Too wide: a stop far from the entry means each failed idea costs a lot, unless the position is small.

The way out is to separate two decisions:

1. Stop distance comes from the idea and the share's volatility.
2. Rupee risk is controlled by position size: buy fewer shares when the stop is far away, more when it is near, so the loss at the stop is the same fixed share of capital. The position size lesson shows how.

A "tight stop" with a large position can risk more money than a wide stop with a small one.

Trailing stops

A trailing stop moves in the direction of a profitable trade, for example staying two ATRs below the highest close since entry, or just below each new swing low. It locks in part of a gain while leaving room for the trend to continue. It never moves back.

What stops cannot do

• Gaps: if the price opens far beyond the stop, the order fills at the available price, possibly much worse, as the price gaps lesson shows.
• Thin liquidity: in a share with few buyers, a stop-loss sell may fill well below the trigger, or a limit-type stop may not fill at all.
• Price bands: a share locked at its lower circuit may not trade at all, as the circuit breakers lesson explains.

A stop is a plan for normal conditions, not insurance against every outcome.

Why it matters

Stop placement is where many traders lose money without noticing: too tight, and noise eats the capital in small bites; too wide with too large a position, and one failed idea causes serious damage. Placing stops from the idea and volatility, and controlling risk through size, keeps losses consistent and survivable.

Limitations

Neither structure nor ATR gives a "correct" stop; both involve judgement. Volatility changes, so a stop that suited last month may not suit this one. Gaps, thin trading and price bands can all make actual losses larger than planned.

Common mistakes

• Setting stops by round percentages unrelated to the chart or volatility.
• Placing stops exactly at obvious levels.
• Moving stops further away as the price approaches them.
• Using tight stops with large positions and thinking the risk is small.

Try it yourself

1. Choose a share and note its latest close, recent swing low and 14-day ATR.
2. Calculate a structure stop with a small buffer and an ATR stop at two ATRs.
3. Compare the distances, and note how many sessions in the last month moved more than the tighter one.
4. Write down which you would use and why.