Why do we need to set STOP LOSS?

For example if I buy at 100 and set a stop loss of 98 and set the target at 106. Now if the price hits 98 and then goes up to 107 or something like that, I would be losing instead of making money. Now if there was no stop loss set, I would have made profit.

Now, you might say that without stop loss, you would be losing huge amount of money. Recently it happened the same, but I took delivery. In few days I made profit. Isn’t it a good strategy?


If you are trading the markets, I guess you have plans to invest/trade for a long period of time. Markets have been bullish in the recent past and hence even if you held a loss making buy trade, it would have most likely turned around and shown you some profits. But what you need to remember is that markets won’t be bullish all the time and it is a wise to have some kind of risk management strategy:

  1. Either have stops.

  2. You invest/trade on a particular stock with very small amount of your capital, that is reduce your bet size drastically so that you don’t need to worry about stops.

If you are planning delivery trades, a 2% is a very tight stop according to me. There is also a saying in the markets, " Not having stops kills amateurs and too many stops kills the professional".

So is not having stops a good strategy?

It depends, but make sure that if you don’t have stops atleast the bet size is minimum. If you have 1lk allocated for trading, don’t take more than 3k to 5k bet on a single trade if you are doing delivery based trades.


Regardless of the strategy, winning probability, guts etc etc, what you keep as profits at the end of the day, end of the month , end of the quarter and end of the year , is what really matters to you, your life and your dependent peoples future.

See, if you start trading with a capital of 2 lakhs and you consecutively make money for 9 months with 10 lakhs profit but in the 10th month if you loose all the 12 lakhs , then you will be still a looser to yourself and in the eyes of people who is surrounding you. Life will be miserable. It is just an example, in real market scenario, you can’t run even 1 or 2 weeks.

So always remember, how much more money you make on winning trades is not a big deal , the real deal is how much you loss when the trade goes wrong. Be a consistent winner with discipline.

Even very long term investors too keep a 8% stop loss over their portfolio. Traders should not loose more than 1% in any trade. You have to keep your capital, position sizing, stop loss etc based on that.

A 10% loss will ask you a 11% win on next trade to come back where you were. A 50% loss will ask you a 100% win on next trade to come back again where you were. Higher the loss, more than that a win required to come back to your capital. Then how to come as profitably?

Trading is an art or skill, something you have to learn, something you have to born with.


Interesting question and very important one too and the answer is it is not a good strategy. Instead work on improving stop loss strategy. Let me explain in detail -

We traders are playing a probability based game. As it happens often, markets hits stop loss and then turn profitable, there is an equal probability (in fact slightly more) that markets may continue the journey much beyond stop loss creating huge losses.

Markets are known to create false beliefs and then trap traders. This scenario is just one of them. We place a trade, it hits stop loss, we are out and then market turns around. We feel we should not have kept stop loss and so we don’t do it in following trades and many times they turn out to be big losers wiping out all our profits. There are many who have taken deliveries in 2007-2008 and earlier and are still waiting having lost almost 100% of the capital. In fact this happens day in and day out with some or the other stock. Scan the markets on monthly charts and you will see many examples. In fact while Nifty/Sensex are making all time highs, there are only 10-20% stocks following them, rest of them are not. Run a Relative Performance scan on monthly charts for NSE/BSE all stocks and you will see what I mean. And it does not happen to only you and me, it can happen to any one. For e.g Rakesh Jhunjhunwala had bought A2Z maintenance which he recently sold for just 1/10 to 1/20 of the purchase price. But he can afford it, we cannot. He is a much smarter investor and has many more multi baggers. I have mentioned this e.g. just to illustrate that any one can have such huge losses.

Instead of removing the stop losses, one should work on stop loss strategy. Here are some guide lines
-Best way to determine correct stop losses is to back test and do walk forward testing.
-When trading with trend one can keep wider stop losses to avoid getting stopped out and missing the big move.
-In counter trend trades one should have tight stop losses since when the original trend resumes, it can move very sharply.
-Similarly stop losses should be tight while trading within narrow ranges. Any breakout could be a violent move and if happens against the trade will result in huge losses.
-In volatile markets, one should have wider stop losses to let the trade work out.
-Some possible stop losses - below/above recent swing lows/highs, high/low/close - atr multiple, n-period high/low/close (e.g. lowest low in last 2 days for long position), Parabolic Sar, Super Trend, Moving Averages, Trend lines and channel. List is endless. All of the above can be used individually or in combination. Also most of them can be used as trailing stop loss. One common technique is to use larger MA (50 or 20) initially and then shorten the MA period (to 20 or 10) as trade becomes favourable.
-One can combine position sizing with stop loss to keep same amount of risk on every trade. e.g. If SL is 10 one can may buy 100 while if the SL is 20 one may buy only 50 to keep risk of 1000 in both the scenarios.

All of the above are my personal suggestions but would advice to refer to authoritative sources
-Charles/Chuck LeBeau is one of the pioneers of computerised back testing and has worked extensively on Stop Loss and Exit strategies. He has several video courses which are very good.
-Dr. Van Tharp - very good material on risk management and position sizing.

Some final thoughts -

In simple terms stop loss is just a risk management process that helps in preventing unforeseen huge losses but it is the most important one. Remember the saying cut your losses and let your winners run - its stop loss that helps in cutting losses and trailing stop loss help in letting the profit runs.

Most important thing in trading is capital preservation. If one has capital one can always trade again but if one losses all the capital than how will one trade. Remember its not important that every trade be winner, but to be profitable over a period of time. Its like losing small battles to win the ultimate big war.

We win some, we lose some but in the end our win sum should be more than lose sum. While most of us concentrate on entries, it is the exit strategy that determines the out come.

Finally remember next entry is just a commission away. And with our friendly neihgbourhood broker Zerodha it is as good as nothing :slight_smile:


At times stop loss becomes your savior. :slight_smile:

Read Nithin’s post here



All your hard earned money can be wiped off in a blink, if you dont set stop loss for a single bad trade. If you think you could react faster than market, you are wrong.

As a precautionary measure I set stop loss for every single trade nowadays. But where to set the stop loss is the key point.

To have stop loss or not to have?

It depends whether you trade based on prediction or probability. Predictions wont need stop loss mostly. Probability trading is calculated based on risk:reward ratio and success rate. Risk means stop loss and reward means target.

Virtually market is unpredictable. Stock trading is purely a probability game.

Also probability based trading needs a solid strategy with precise specifications like target, stop loss etc.

Bottom Line : Learn & Earn !

Feel free to download Free Premium Strategies here : intradaytradingsecrets.blogspot.in

1 Like

How true = “Not having stops kills amateurs and too many stops kills the professional”

Lovely answer dude, but you did not explain the S/L trades (NEST)

Zerodha has blog post on stop loss orders http://zerodha.com/z-connect/tradezerodha/zerodha-trader-software-version/stop-loss-orders-limit-market

lovely da, very beautifully explained…

Thank you Sudesh.

well explained, Ajay.

Thank you N.

Every trader must use a stop loss order in trading because it protects their money in the market. Stop loss limits the maximum loss of the trader in a particular position so that when the loss crosses its limit, it will automatically close. Stop loss provides many benefits, it is a key point in trading.

How many guys are victim of hitting stop loss then market move in their direction?

How many guys got benefitted by placing stop?


Market is always right ?? I never saw it is write if it is right then why people lost money ?

Hello Friend

Market is like a tough examination. To get pass in tough examination how we will prepare? Either we have to answer more questions right or We have to answer only few questions which give us more marks.

Likewise We will loose money in market when we are wrong. We earn money in market when we are right.

To get profitable in market either “We have to be right more times” or “We have to earn more when we are right”