How to set stop-loss points? A must-read guide for beginners on loss control

In the investment market, risk is an unavoidable topic forever. Many novice investors often overlook the importance of risk management until losses occur, leading to regret. Stop loss, as the most critical tool in the investment defense line, can effectively help us protect principal and make rational decisions. This article will delve into the core concepts of stop loss, why it is necessary to set stop loss points, and how to scientifically establish a suitable stop loss strategy for yourself.

What is a Stop Loss? Understanding the True Meaning of Stop Loss Points

Stop Loss (止損), simply put, is stopping losses—when the price of the held asset drops to a preset level, actively closing the position to limit losses.

Stop loss point refers to the specific price level that triggers the stop loss action. Once the market price falls to this point, the trading system will automatically execute the closing operation without manual intervention.

This seemingly simple concept is the dividing line between mature investors and reckless gamblers.

Why Must We Set Stop Loss Points? Three Core Reasons

Reason 1: Timely stop loss can correct wrong decisions

Our logic for buying assets can sometimes be flawed. Setting a stop loss point is equivalent to giving yourself a “mistake acknowledgment” opportunity—when the price continues to decline confirming our judgment was wrong, the stop loss helps us exit in time, avoiding deeper losses.

Reason 2: Responding to drastic market changes

Investment environments change rapidly. The original reasons for buying may become invalid due to policy adjustments, black swan events, industry policy changes, etc. Investors without stop loss points often are forced to cut losses in panic, even losing all capital. During irrational market downturns caused by global pandemics, geopolitical conflicts, etc., stop loss points become the last line of defense against systemic risks.

Reason 3: Technical breakdowns often indicate larger declines

From a technical perspective, when an asset’s price breaks below important support levels, it usually triggers chain reactions, leading to deeper declines. Not setting a stop loss point means allowing losses to expand infinitely.

What Happens Without Stop Loss? A Real Case

Suppose you buy a stock at $100 per share with $10 million USD. Two scenarios may occur:

Most optimistic case: The stock price keeps rising, eventually reaching profit targets, and you successfully cash out.

More common case: The stock price suddenly pulls back, dropping 10%, leaving $9 million USD; a 30% drop leaves $7 million; a 50% drop leaves $5 million.

The key question: If the stock drops to $50 (a 50% decline), to break even, it needs to rise 200%. On the surface, this isn’t impossible, but in reality:

• Most investors’ psychology collapses after losses over 50%, and they tend to cut losses further during continued declines.
• Many assets eventually lose over 90%, with almost all principal evaporated.
• Even if a rebound occurs later, it may take years to recover.

The advantage of setting a stop loss is obvious: if you stop loss at a 10% loss, the remaining $9 million USD only needs an 11% profit to break even. This greatly improves capital efficiency and psychological resilience.

Technical Indicators to Help Determine Stop Loss Points

Besides simple percentage methods (stop loss at 10% loss) or amount-based methods (stop loss at $1 million loss), investors can also use technical analysis tools to precisely locate stop loss points:

Support and Resistance Levels

In a downtrend, when the price repeatedly tests a certain level but fails to break through, that level is a support level. If the price breaks below support, it usually indicates larger declines ahead. Set the stop loss below the support level.

MACD Indicator

MACD is a classic tool for trend reversal judgment. When the short-term moving average crosses below the long-term moving average, forming a “death cross,” it signals a clear downtrend. You can set the stop loss below this point or use it as a reference signal.

Bollinger Bands (BOLL)

Bollinger Bands include upper, middle, and lower bands. When the price breaks below the middle band from above, it signals a sell. If the price continues to move between the middle and lower bands, maintain or adjust the stop loss accordingly.

Relative Strength Index (RSI)

RSI reflects overbought and oversold conditions. When RSI exceeds 70, it indicates overbought (increased risk of decline); below 30, oversold. Setting stop loss points in overbought zones can effectively capture tops.

How to Scientifically Establish Stop Loss Points? Three Execution Methods

Depending on risk tolerance and trading style, investors can choose from the following three stop loss methods:

Method 1: Active Manual Stop Loss

The most direct approach—investors manually execute closing based on market conditions. The advantage is flexibility; the disadvantage is the need to monitor constantly and susceptibility to emotional influence.

Method 2: Conditional Stop Loss (Automatic Stop Loss)

Set a stop loss price when opening a position; once the market reaches that price, the system automatically closes the position. This is the most common method, with the advantage of being unaffected by emotions, but the risk of being stopped out during false breakouts.

Steps to set:

1. Open the trading page, select the target asset
2. Click the stop loss button
3. Enter the preset stop loss price or loss percentage
4. Confirm the order

Method 3: Trailing Stop Loss (Moving Stop Loss)

A dynamic stop loss method. The stop loss level moves upward with the asset price but remains fixed when the price declines. This protects principal while allowing profits to run.

For example, set a 2-point trailing distance: when the stock rises from $50 to $60, the stop loss automatically moves from the preset $45 to $55, locking in at least $5 per share profit.

Practical Recommendations for Setting Stop Loss Points

Step 1: Determine your risk tolerance

Different investors have different risk preferences. Conservative investors may set a 3-5% stop loss; aggressive ones may set 10-15%. The key is to find your comfort zone.

Step 2: Combine technical and fundamental analysis

Stop loss points should not be set in isolation. Consider support levels, moving averages, MACD, and fundamental changes.

Step 3: Avoid frequent adjustments

Once the stop loss point is set, unless there are major fundamental changes, do not move it frequently. This prevents being misled by market noise.

Step 4: Regularly review your stop loss strategy

Market conditions change, and so should your stop loss approach. Regularly review past execution results, summarize experience, and optimize future settings.

Summary: Stop Loss is a Survival Skill, Not a Passive Action

The essence of stop loss is risk management, not surrender. It reflects rational thinking—timely stopping losses within controllable limits, preserving more capital for future gains.

Whether using technical indicators (MACD, RSI, Bollinger Bands), support and resistance levels, or simple percentage methods, there are many ways to set stop loss points. The key is to find a method that suits your trading style and to strictly adhere to discipline.

True investment masters are not those who win every trade, but those who minimize the damage of losing trades through effective stop loss management. Learning to set stop loss points is equivalent to mastering the survival rules of the investment market.