Stop-Loss Strategies
A stop-loss is your insurance policy. It limits losses when you're wrong.
Why Stop-Losses Matter
"Cut your losses short, let your winners run."
Without a stop-loss:
- Small losses become big losses
- Emotions take over ("it'll come back")
- One bad trade can wipe out many winners
Stop-Loss Methods
1. ATR-Based Stop
Use Average True Range for volatility-adjusted stops:
| Stop Type | Calculation | Use Case |
|---|---|---|
| Tight | Entry - (1 × ATR) | Day trading, scalping |
| Normal | Entry - (2 × ATR) | Swing trading |
| Wide | Entry - (3 × ATR) | Position trading |
Example:
Entry: $100
ATR: $3
Tight Stop: $97
Normal Stop: $94
Wide Stop: $91
2. Technical Level Stop
Place stop below key support levels:
| Level | Description |
|---|---|
| EMA 50 | Medium-term support |
| EMA 200 | Long-term support |
| Supertrend | Dynamic support |
| Ichimoku Cloud | Cloud bottom |
| Recent Swing Low | Previous support |
3. Percentage Stop
Simple fixed percentage:
| Risk Tolerance | Stop Distance |
|---|---|
| Conservative | 5% |
| Moderate | 8% |
| Aggressive | 12% |
4. Time Stop
Exit if trade doesn't work within timeframe:
| Strategy | Time Limit |
|---|---|
| Breakout | 3 days |
| Swing Trade | 2 weeks |
| Position Trade | 1 month |
Stop-Loss by Strategy
| Strategy | Stop-Loss Level |
|---|---|
| Trend Following | Below EMA 50 or Supertrend |
| Mean Reversion | Below lower Bollinger Band |
| Breakout | Below breakout level |
| Dividend/Long-term | Below EMA 200 |
Trailing Stops
Move your stop up as price rises to lock in profits:
Supertrend Trail
Entry: $100
Initial Stop: $95 (Supertrend)
Price rises to $110:
New Supertrend: $105
Move stop to $105
Price rises to $120:
New Supertrend: $115
Move stop to $115
EMA 21 Trail
Entry: $100
Initial Stop: $95
Price rises, EMA 21 rises:
EMA 21 at $108 → Move stop to $107
EMA 21 at $115 → Move stop to $114
Percentage Trail
Entry: $100
Trail: 10%
Price at $100 → Stop at $90
Price at $110 → Stop at $99
Price at $120 → Stop at $108
Take-Profit Strategies
| Strategy | Take-Profit Level |
|---|---|
| Trend Following | Trail stop at EMA 21 |
| Mean Reversion | Middle Bollinger Band or RSI 70 |
| Breakout | 2:1 or 3:1 risk-reward ratio |
| Long-term | Fundamental target or 52W high |
Risk-Reward Ratios
Always aim for positive risk-reward:
| Ratio | Meaning | Win Rate Needed |
|---|---|---|
| 1:1 | Risk $1 to make $1 | 50%+ |
| 1:2 | Risk $1 to make $2 | 33%+ |
| 1:3 | Risk $1 to make $3 | 25%+ |
Example (1:2 ratio):
Entry: $100
Stop: $95 (risk $5)
Target: $110 (reward $10)
Even with 40% win rate:
4 wins × $10 = $40
6 losses × $5 = $30
Net profit: $10
Common Mistakes
❌ No stop-loss - Unlimited downside ❌ Stop too tight - Stopped out by normal volatility ❌ Stop too wide - Losses too large ❌ Moving stop down - Never widen a stop ❌ Mental stops - Always use actual orders
Stop-Loss Checklist
Before every trade:
- Stop-loss level determined
- Risk per share calculated
- Position size adjusted for risk
- Stop-loss order placed
- Risk-reward ratio acceptable (>1:2)
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