3 Ways to Set Up a Stop‐loss Order - wikiHow (2024)

FAQs

How to set up a stop loss order? ›

Go to the section of your online brokerage account where you can place a trade. Instead of choosing a market order, choose a stop loss order. Enter or scroll down to the price at which you would like to place a stop loss order. Relax.

There are two types of stop-loss orders: one to protect long positions (sell-stop order), and one to limit losses on short positions (buy-stop order).

Always sell a stock it if falls 7%-8% below what you paid for it. This basic principle helps you always cap your potential downside. If you're following rules for how to buy stocks and a stock you own drops 7% to 8% from what you paid for it, something is wrong.

If a stock price suddenly gaps below (or above) the stop price, the order would trigger. The stock would be sold (or bought) at the next available price even if the stock is trading sharply away from your stop loss level.

Calculate Stop Loss Using the Percentage Method

Additionally, let's say you own stock trading at ₹50 per share. Accordingly, your stop loss would be set at ₹45 — ₹5 under the current market value of the stock (₹50 x 10% = ₹5).

Example Scenario

A SL limit sell order is placed at ₹170, triggered at ₹180. Given the current market price of ₹185 and the placement of the SL limit sell order at a lower price, the order will function as a market order and execute immediately. Consequently, all available quantities will be sold for up to ₹170.

There are no hard-and-fast rules for the level at which stops should be placed; it totally depends on your individual investing style. An active trader might use a 5% level, while a long-term investor might choose 15% or more.

For example, if the stock is bought at Rs. 100 and the stop-loss order value is set to 10% (Rs. 90), in such a case when the price reaches Rs. 90 and is about to go lower, the stop-loss order is executed, and the trade is closed at Rs.

There are two types of stop-loss orders in the share market: Fixed Stop-Loss Order. Trailing Stop-Loss Order.

The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.

What is the 1% rule for stop-loss? ›

For day traders and swing traders, the 1% risk rule means you use as much capital as required to initiate a trade, but your stop loss placement protects you from losing more than 1% of your account if the trade goes against you.

One popular method is the 2% Rule, which means you never put more than 2% of your account equity at risk (Table 1). For example, if you are trading a $50,000 account, and you choose a risk management stop loss of 2%, you could risk up to $1,000 on any given trade.

Disadvantages of stop-loss orders

Market fluctuation and volatility. Stop-loss orders may result in unnecessary selling or buying if there are temporary fluctuations in the stock price, especially with short-term intraday price moves.

When the price drops or rises very fast, a market stop loss might execute at worse prices, and the limit stop loss might not execute at all. Check the next section to find out more about limit stop losses. Market orders are there to buy or sell something as fast as possible at the best available price right now.

When placing a Stop Loss or a Take Profit level the following parameters must be met: On a Buy Order, the Stop Loss level must be placed at a lower price than the Order price, as well as this, the Take Profit level must be placed at a higher price than the Order price.

This method allows traders to adapt their risk management strategy based on the volatility of the stock. A common practice is to set the stop-loss level between 1% to 3% below the purchase price. For example, if you buy a stock at Rs. 300 per share, a 2% stop loss would be triggered at Rs.

No cost to implement. There is no fee or charge to place a stop-loss order. The only fee incurred is if the stop price is reached and a market order occurs, which may result in a transaction fee.

Disadvantages. The main disadvantage of using stop loss is that it can get activated by short-term fluctuations in stock price. Remember the key point that while choosing a stop loss is that it should allow the stock to fluctuate day-to-day while preventing the downside risk as much as possible.

Although there is no general way of structuring your stop loss and take profit orders, most traders try to have a 1:2 risk/reward ratio. For instance, if you are willing to risk 1% of your investment, then you can target a 2% profit per trade.