Types of Stop Loss Techniques Every Trader Should Know

In the world of trading, making a profit is great, but protecting your trading account is even more important. A lot of new traders put in the hard work to focus on the trading strategies to get started; however, they completely forget about one of the great elements of risk management trading, the stop loss.

A stop loss is more than just an order to the market to exit a position. A stop loss is an automated way to control the risks associated with trading, to maintain a level of discipline in the trading, and is the one thing that can determine if a trader will survive in trading in the long run, or if they will blow out their trading account.

In this guide, we will outline the stop loss techniques that exist, review some popular stop loss techniques, and outline how some professional traders survive the markets with their stop loss methods.

 

Function of a Stop Loss in Trading

The important aspect of a trade, the goal of a trader, is to make a profit. A trader will 'get out' of a trade and 'lose' the position, determining the loss on the trade, and minimise their loss on a trade, which is called a stop loss. This crosses the traders in protecting their capital versus being on the losing end.

The stop loss trade is the answer to the question of risk-to-reward.

• How much am I risking on the trade?

• How do I stop trading once I reach a certain loss?

• Am I trading to reduce loss or trade to break even?

• Without a stop loss, a trader has to control their emotions.

 

 

Simple Stop Loss System of Risk Management Trading

The goal of professional trading is being 'right' over and over. The goal of professional trading means the control of trading risk, the management of loss, the ratio of risk to loss, and the control of trade.

• Smaller losses.

• Larger profits.

• A trade system that is in a fixed system.

With a fixed loss system, a Stop Loss system keeps the drawdown limited, and Reverse Trading. Now, let's dive into more of the Stop Loss system for profit controlling.

 

Stop Loss that is Fixed

From the name, a fixed stop loss does not change. Simple to understand and a simple definition. A fixed stop loss can also be referred to as an 'open' loss, which means the stop loss is placed at an 'open' loss. The stop loss is determined prior to any movement in the market. The loss is determined and pre-set for a position block, and the loss will not change for any amount of market movement.

Example:

- Purchase stock for ₹500

- Set stop loss at ₹480

- Risk = ₹20 for every share

Best for:

- Newbies

- Position traders

- Mechanical trading systems

Pros:

- Straightforward.

- Eliminates emotional trading.

Cons:

- Doesn't adjust for market shifts.

- Is susceptible to temporary pullbacks.

In disciplined trading, a fixed stop loss is a rudimentary yet very popular method within the stop loss techniques.

 

2. Percentage-Based Stop Loss

What is a Percentage Stop Loss?

In this method, the loss is set when a fixed percentage of the entry price has been lost.

Example:

- Entry price: ₹1,000

- Stop Loss: 2%

- Stop Loss price: ₹980

Best for:

- Swing traders

- Portfolio trading

- Risk control

Pros:

- Consistent risk for each trade

- Simple to compute and program

Cons:

- Does not consider the market situation

- Does not work for unpredictable stocks

In trading for risk management, the percentage stop loss is very often used by retail traders.

 

3. Technical Stop Loss (Support & Resistance Based)

What Is Technical Stop Loss?

A technical stop loss is when one places a stop loss based on:

• The support levels.

• The resistance levels.

• The trendlines.

• The chart patterns.

Example:

• Buying near support.

• Stop loss just below support zone.

Best For:

• Price action traders.

• Swing and positional traders.

Pros:

• Based on the market structure.

• Reduces random stop outs.

Cons:

• Needs chart reading skills.

• It is subjective if not well defined.

Of all stop loss strategies, this is one of the most professional approaches when used correctly.

 

4. Trailing Stop Loss

What Is Trailing Stop Loss?

A trailing stop lossis when one sets a stop loss that only moves in one's favour, meaning it can go up, but it can never go down.

Example:

Buy at ₹200

Trailing stop: ₹10

Price goes to ₹230 → Stop moves to ₹220

Best For:

• Trend followers.

• Momentum traders.

• Long trending markets.

Pros:

• It protects profits automatically.

• It allows winners to run.

Cons:

• It can exit early in choppy markets.

• It needs the right trailing distance.

• Trailing stops can be one of the most powerful tools in a trader's arsenal for capturing big trends.

 

5. Time-Based Stop Loss

What Is Time Stop Loss?

Exiting a trade after a specific period if it has not performed in a desired way.

Example:

Intraday trades should execute in 30 minutes.

If it doesn't, sell it, no matter where the price is.

Best For:

• Scalpers

• Intraday traders

Pros:

• Removes stagnant capital.

• Lowers opportunity cost.

Cons:

• Depends on price structure.

• Can exit before a potential price change.

• Time-based trade exits are frequently utilised in conjunction with other stop loss strategies.

 

6. Volatility-Based Stop Loss (ATR Stop Loss)

What is an ATR Stop Loss?

ATR considers market volatility when determining a stop loss. It relies on the Average True Range (ATR) metric.

Example:

ATR = ₹5

Therefore, stop loss = 2 × ATR = ₹10

Best For:

• Algorithmic trading.

• Index trading.

• Volatile stocks.

Pros:

• Adjusts to market context.

• Fewer stop losses are hit due to market fluctuations.

Cons:

• Requires knowledge of the use of the indicator.

• Less position size due to a higher stop loss.

• ATR stop losses are well-known in the world of trading as examples of ideal risk management trading.

 

7. Candlestick-Based Stop Loss

What Is Candlestick Stop Loss?

The stop loss is placed:

- Below the low of the entry candle

- Below the previous swing candle.

Example:

- Bullish engulfing candle

- Stop loss below its low.

Best For:

- Price action traders

- Short-term setups

Pros:

- Very precise

- Clear invalidation logic

Cons:

- Tight stop may get hit

- Needs confirmation signals.

This is one of the most precise types of stop loss techniques used by experienced traders.

 

8. Moving Average Stop Loss

What Is Moving Average Stop Loss?

Stop loss is placed below a key moving average like:

- 20 EMA

- 50 EMA

- 200 EMA

Best For:

- Trend traders

- Positional traders

Pros:

- Follows trend naturally

- Simple visual reference

Cons:

- Lagging indicator

- Not suitable for sideways markets

Moving-average-based exits are classic stop-loss strategies for trend riding.

 

 

Selecting the Most Suitable Stop Loss Strategy

There is no one best stop loss strategy. The right choice varies depending on:

 

Factor	Consideration
Trading Style	Intraday, swing, or positional
Asset Type	Stocks, index, crypto, forex
Volatility	High or low
Risk Appetite	Conservative or aggressive

 
Traders on the professional level tend to integrate several stop loss strategies for greater precision.

 

Stop Loss Errors Traders Need to Avoid

• After entry, the stop loss is moved.

• Risking too much at once.

• No stop loss applied.

• Stop loss is too conservative.

An important principle of trading risk management: Per trade, never risk more than 1–2% of your total capital.

Know The Difference Between Stop Loss and Stop Limit

Stop Loss Order: Once your stop loss is triggered, it executes at the market price.

Stop Limit Order: Your limit price is the only way it can be executed.

For markets that are fast-moving, stop loss orders can better protect you.

 

Loss Stops: The Insurance For Your Trading

A stop loss will not guarantee that you will make profits. But it will guarantee that you will not get lost. By utilising and practising different kinds of stop loss techniques and processes, as well as creating stop loss methods, you will be able to:

• Safeguard your trading capital.

• Develop consistency in the long run.

• Boost your discipline and confidence.

Always keep in mind this quote: great traders don’t avoid losses-they control them. 

 

Conclusion

Profits in trading fluctuate, but capital protection is permanent. Maintaining consistency, controlling risk, and managing emotions are all made easier by using the proper stop loss techniques. In the market, survival always comes before profits; therefore, learn your stop loss strategies.

 

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.