Stock Market · Risk Management & Psychology

Stop losses

A stop loss is the price at which you exit a losing trade, no questions, no hope, no 'let me wait another day'. The hard part isn't placing one. It's placing one where it actually makes sense.

Bad places to put stops

• Round numbers (₹500, ₹1000). Everyone places stops there, they get hunted
• A fixed percentage (always 5% below entry). Ignores the stock's volatility
• Just below entry (1-2%). Gets you stopped on normal noise

Better stop-loss methods

1. Below recent swing low (technical structure)

2. Below the 20 or 50-day moving average

3. ATR-based (2× the Average True Range below entry)

4. Below a key support level identified on the chart

> Your stop must be far enough that normal volatility doesn't trigger it, but close enough that the loss is acceptable per your position-sizing rules.

ATR-based stop example

Stock at ₹500. 14-day ATR = ₹12. Stop = ₹500 − (2 × ₹12) = ₹476.

Normal daily moves won't trigger it. A real trend reversal will.

Mental stops vs hard stops

Mental stop (you'll exit when price hits X): fails the moment you start hoping.

Hard stop (placed in your broker's system): executes regardless of your emotions.

= Always place hard stops

= Trailing stops lock in profits as the trade moves in your favour

Takeaway. Stop losses placed on chart structure (swing lows, ATR, key support) survive normal noise; ones placed on round numbers or arbitrary percentages get taken out by it. A stop resting in the broker system executes whether or not you are watching. A mental stop depends on you overruling yourself in the exact moment that is hardest.