Stop-Loss Orders: Your Insurance Against Catastrophic Losses
You buy a stock at ₹100. It drops to ₹90, then ₹80, then ₹70. You keep hoping it'll recover. Stop-loss orders would have saved you—automatically selling at ₹95 and limiting your loss to 5% instead of 30%.
Key Takeaways
- Stop-loss orders automatically sell your position when price hits a trigger level
- Set stop-loss 5-10% below entry price for swing trades
- Protects you from catastrophic losses and emotional decision-making
- Use stop-loss for individual stocks, skip for long-term index funds
- Trailing stop-loss locks in profits as stock rises
What Is a Stop-Loss Order?
A stop-loss order is an instruction to your broker to automatically sell a stock when it drops to a certain price. It's your insurance policy against big losses.
Simple Example
You buy Reliance at ₹2,500
You set stop-loss at ₹2,375 (5% below entry)
If price drops to ₹2,375: Automatically sells, limiting loss to 5%
If price rises to ₹2,700: Stop-loss doesn't trigger, you keep the position
Types of Stop-Loss Orders
1. Fixed Stop-Loss
Set at a specific price level. Doesn't move once set.
Example: Buy at ₹100, set stop at ₹95. Stays at ₹95 forever.
2. Trailing Stop-Loss
Moves up with the stock price, locking in profits. Never moves down.
Example: Buy at ₹100, set 5% trailing stop. Stock rises to ₹120 → stop moves to ₹114. Stock drops to ₹114 → sells, locking in 14% profit.
3. Stop-Limit Order
Combines stop-loss with limit order. Sells only within a price range.
Example: Stop at ₹95, limit at ₹93. Triggers at ₹95 but only sells if price is ₹93 or higher. Protects against flash crashes.
Where to Set Your Stop-Loss
| Strategy | Stop-Loss Level | Best For |
|---|---|---|
| Tight | 2-5% below entry | Day trading, low volatility stocks |
| Moderate | 5-10% below entry | Swing trading (recommended) |
| Wide | 10-20% below entry | Position trading, high volatility |
| Technical | Below support level | Chart-based traders |
When to Use Stop-Loss
✓ Use Stop-Loss For
- • Individual stock positions
- • Swing trades (days to weeks)
- • Volatile stocks
- • When you can't monitor daily
- • Leveraged positions
✗ Skip Stop-Loss For
- • Long-term holds (10+ years)
- • Index funds (Nifty 50, S&P 500)
- • DCA positions
- • Very low volatility stocks
- • Dividend aristocrats
Common Stop-Loss Mistakes
Mistake 1: Setting Stop Too Tight
2% stop-loss gets triggered by normal volatility. You get stopped out, then stock rebounds. Use 5-10% for swing trades.
Mistake 2: Not Using Stop-Loss at All
"I'll just hold and wait for recovery." This is how 10% losses become 50% losses. Always protect your downside.
Mistake 3: Moving Stop-Loss Down
Stock drops to stop level, you move stop lower to avoid selling. This defeats the purpose. Never move stop-loss down, only up (trailing).
Mistake 4: Using Stop-Loss on Index Funds
Index funds are for 10+ year holds. They will drop 30-50% during crashes but always recover. Stop-losses lock in losses.
FAQ
What if my stop-loss triggers and the stock rebounds?
Can I set stop-loss on all my stocks at once?
Do stop-loss orders expire?
Should I use trailing stop-loss or fixed?
What happens during a flash crash?
Protect Your Downside
Stop-loss orders are your safety net. Use them on every swing trade.
Set stop-loss when you buy
Use 5-10% for swing trades
Never move stop-loss down
Investment Risk Disclaimer
This content is for educational purposes only and should not be considered financial advice. All investments carry risk, including the potential loss of principal. Past performance does not guarantee future results. Before making any investment decisions, please consult with a qualified financial advisor who understands your personal financial situation, risk tolerance, and investment goals.
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