A stop-loss is a price, decided before you enter a trade, at which you will exit if the market goes against you. It turns an open-ended risk into a planned one. A stop-loss order is the instruction you give your broker so the exit happens automatically, even if you are not watching the screen.
The stop is the other half of position sizing: the distance from your entry to your stop, multiplied by the quantity, is the amount you are risking. Without a stop, that amount is unknown.
How a stop-loss order works
A stop-loss order sits with the exchange or broker, inactive, until the price touches a level you set called the trigger price. When the trigger is hit, the order becomes live and tries to exit your position. Indian brokers usually offer two kinds:
- SL (stop-loss limit). You set a trigger price and a limit price. When the trigger is touched, a limit order is placed at your limit price. You control the worst price, but if the market jumps past your limit, the order may not fill at all and you stay in a losing trade.
- SL-M (stop-loss market). You set only a trigger price. When it is touched, a market order is sent and it fills at whatever price is available. You get out, but in a fast or thin market the fill can be worse than the trigger. This difference is called slippage.
Example. You bought HDFC Bank at ₹1,950 and want out below ₹1,915. With an SL order you might set trigger ₹1,915 and limit ₹1,910: once ₹1,915 trades, a sell at ₹1,910 or better is placed. If the price drops from ₹1,916 to ₹1,905 in one go, your ₹1,910 limit may sit unfilled. With an SL-M order at trigger ₹1,915 you would be sold, perhaps at ₹1,906.
Exchanges and brokers set rules about which order types are allowed in which segments (for example, some restrict stop-market orders in options). Check what your broker currently allows.
For a short position (you sold first), the stop is a buy order placed above the price, and everything else works the same way.
Where to place a stop-loss
The most useful rule is: put the stop where your reason for the trade is proven wrong, not at a round number of rupees you would like to lose. Then size the trade so that the loss at that stop fits your risk per trade. Common methods:
- Below support or above resistance. If you buy because a stock bounced from ₹1,900, a close below ₹1,900 says the bounce failed. Put the stop a little below, so normal noise does not hit it. See support, resistance and pivot points.
- Beyond an indicator line. Trend traders often exit when the price closes below the Supertrend line or a moving average such as the 20-day or 50-day.
- A multiple of ATR. The Average True Range measures normal daily movement. A stop 1.5 to 2 ATRs from entry gives the trade room to breathe in proportion to how volatile the stock is.
- Below the previous swing low (for a buy) or above the swing high (for a sell).
- A time stop. If the expected move has not happened within a set time, exit anyway. Option buyers use this because time decay works against them every day.
A live example: stop levels on a real chart
Here are the main indicator levels for Infosys from the latest nightly update: the 50-day and 200-day averages, the Supertrend line and the pivot levels:
Look at how far the price is from each level. If the Supertrend direction is up, its value is a common trailing stop for a long position. The pivot S1 is a nearby support for an intraday trade, and the 50-day average a wider one for a swing trade. Each gives a different stop distance and therefore a different position size for the same rupee risk. The full set of levels is on the technicals pages for every NSE stock.
Trailing stops: locking in profit
A trailing stop moves in your favour as the trade works, and never moves back. If you bought at ₹1,950 with a stop at ₹1,915, and the price climbs to ₹2,050, you might raise the stop to ₹2,000. The trade can no longer become a loss, and if the move continues you keep raising it.
You can trail by a fixed amount, by a percentage, under each new swing low, or along an indicator such as Supertrend. Trailing too tightly gets you out on normal pullbacks; trailing too loosely gives back much of the profit. Testing different trailing rules on past data with the backtester shows the trade-off for a given stock.
Stop-losses for options and straddles
Options move faster than their underlying, so a stop on the option premium is usually placed in percentage terms (for example, exit if the premium falls by a set share of what you paid). Many traders prefer to set the stop on the underlying instead, such as exiting a NIFTY call if NIFTY breaks a level, because option prices can spike briefly on thin trading.
Intraday straddle sellers often use a stop on the combined premium: if the straddle sold at ₹290 rises above, say, ₹350, both legs are bought back. The live straddle line is how they watch that:
The dashed VWAP line is a common reference: a straddle climbing back above its VWAP is a sign the day is getting busier than sellers expected.
What a stop-loss cannot do
- It cannot stop a gap. If a stock closes at ₹1,950 and opens at ₹1,850 after bad news, a stop at ₹1,915 fills near ₹1,850. The loss is larger than planned. Overnight and positional trades need smaller sizes for this reason; see gap up and gap down.
- It cannot always fill at circuit limits. If a stock hits its lower circuit (the most it may fall in a day), there may be no buyers at all, and your stop cannot execute until trading resumes.
- It cannot make a bad trade good. A stop limits the damage of a wrong idea. It does not make the idea right.
Common mistakes
- Moving the stop further away when the price gets close. This turns a planned small loss into an unplanned large one, and it is the most common mistake of all.
- Stops that are too tight. A stop inside normal daily noise gets hit by random movement before the idea has a chance.
- Stops at obvious round numbers. Many stops cluster just below ₹2,000 or 25,000. Prices often dip through such levels briefly and then recover.
- A mental stop with no discipline. Deciding "I will sell if it falls to ₹1,915" and then not doing it is the same as having no stop.
- No stop on short options. A sold option has a loss that keeps growing with the move. Selling options without a defined exit or hedge is one of the fastest ways to lose a large amount.