An order placed with a broker to buy or sell a security once it reaches a specific price, designed to limit investor loss.
A stop loss is an automated order placed with a stockbroker to close a trading position once the stock price reaches a specific limit. It is designed to restrict a trader's downside risk on a position.
When you enter a trade, you define a price level where your trade thesis is proven wrong. You place a stop-loss order at that price. If the stock moves against you and hits that trigger price, the broker automatically executes a market or limit order to close your position, preventing further losses.
Stop loss is the single most important rule of trading survival. It ensures that a single bad trade does not wipe out your entire trading account. It removes emotional decision-making during fast market drops, forcing you to accept small losses so you can live to trade another day.
You buy 100 shares of SBI at ₹700, hoping it will rise to ₹740. However, to protect yourself, you place a stop-loss order at ₹685. This means your maximum risk on the trade is ₹15 per share (₹1,500 total). If bad news strikes and the stock drops to ₹650, your position is automatically closed at ₹685, saving you from a much larger loss.
A stop loss should be placed below key support levels (for buy positions) or above key resistance levels (for sell positions). You can also use technical indicators like Average True Range (ATR) or moving averages to place them.
Practice trading stocks with live NSE/BSE market prices and ₹10,00,000 in virtual capital on Arthhwise.
Download Free Android AppThe process of identifying, analyzing, and accepting or mitigating uncertainty in investment decisions.