Detailed explanation of stop-loss points: Three essential strategies every investor must learn

In the investment market, risk management is often the key to an investor’s long-term success or failure. Many novice investors make a fatal mistake at the beginning—failing to plan their risk defenses in advance. Today, we will delve into the core risk management tool of stop-loss, helping you understand the meaning of the stop-loss point and how to scientifically establish your own stop-loss system.

The Meaning of the Stop-Loss Point: Simple but Important

Simply put, stop-loss is to stop losses (Stop Loss), and the stop-loss point is the price level that triggers the stop-loss. Once the asset price falls to your preset stop-loss point, the system or you will automatically or manually execute a position closure to limit further losses.

Many people ask: Why should we stop-loss? The answer is straightforward—because we cannot predict the future trend of the market. The logic behind buying a certain stock or asset initially might be correct, but market conditions change rapidly, and the original investment assumptions can become invalid at any time. At this point, setting a stop-loss point becomes the last line of defense to protect your capital.

Imagine this scenario: using $10 million to buy Apple stock at $100 per share. If luck is on your side, the stock price keeps rising; but if unfortunate black swan events occur, and the stock drops from $100 to $50 (a 50% decline), your capital shrinks to $5 million. To break even at this point, the stock needs to rise at least 200%—a long and painful process for most investors. Even more dangerous, continuous losses can crush an investor’s mentality, eventually leading to panic selling, with losses possibly exceeding 90%.

In contrast, if you cut your losses at 10%, leaving $9 million, you only need an 11% profit to recover your losses. That’s the essence of the stop-loss point—it’s not about admitting failure, but about reallocating funds more efficiently.

Three Main Methods to Set Stop-Loss: Find the Approach That Fits You

Method 1: Fixed Percentage or Amount Method

The most straightforward way to set a stop-loss is to establish a fixed loss percentage or amount. For example, deciding that any trade should not lose more than 10%, or that a single loss should not exceed $1,000. The advantage of this method is simplicity and ease of implementation, especially friendly to beginners. The downside is that it doesn’t consider the volatility characteristics of different assets—a highly volatile stock may require a wider stop-loss range.

Method 2: Technical Indicator Assistance

More advanced investors often combine technical indicators to determine stop-loss levels, ensuring a scientific logic for stop-loss and adapting flexibly to different market phases. Here are some commonly used technical indicator methods:

Support and Resistance Levels

In a downtrend, stock prices often repeatedly touch a certain level without breaking through—that’s the support level. When the price breaks below support, it often signals a larger decline. Therefore, you can set your stop-loss just below the support level; once the price falls through this line, execute the position closure immediately.

MACD Indicator

The Moving Average Convergence Divergence (MACD) is a powerful tool for judging momentum shifts. When the fast line (short-term) crosses below the slow line (long-term), it forms a death cross, usually indicating a downtrend. You can set your stop-loss below this crossover point to exit timely.

Bollinger Bands (BOLL)

Bollinger Bands consist of an upper band, middle band, and lower band. When the price drops below the middle band after moving between the upper and middle bands, it signals a sell, which can serve as a stop-loss point; if the price continues downward between the middle and lower bands, you can further adjust your stop-loss position.

Relative Strength Index (RSI)

RSI is used to identify overbought and oversold conditions. When RSI exceeds 70, it indicates overbought; below 30, oversold. Overbought conditions often precede a decline, so you can set stop-loss points near the current price to prevent further downside.

Method 3: Dynamic Trailing Stop

If fixed stop-loss is passive defense, then dynamic trailing stop is active offense. This method allows your stop-loss to automatically rise as the asset price increases, but remains unchanged when the price falls back. For example, during an upward trend, set the stop-loss to trail the price upward by 2%. Once the price reverses and hits the stop-loss, the system will automatically close the position. This way, profits can continue to run while protecting already gained gains from being wiped out.

Practical Application of the Stop-Loss Point

After understanding the meaning and methods of setting stop-loss points, the key is to stick to them in actual trading. Here are some points for establishing disciplined stop-loss practices:

First, set your stop-loss before entering the trade. You should calculate where your stop-loss will be before buying, not as a remedial measure afterward.

Second, adjust according to your risk tolerance. Different investors have different capacities for losses. Beginners should generally set smaller loss thresholds (e.g., 5-10%) to protect their principal.

Third, avoid frequent adjustments of your stop-loss. Some investors raise their stop-loss levels repeatedly after losses, hoping for a rebound, but often end up with larger losses. Once set, the stop-loss should be strictly enforced.

Finally, review your stop-loss decisions regularly. Analyze trades where the stop-loss was correctly executed and those where the price rebounded after being stopped out, to learn from experience and optimize your stop-loss system gradually.

Summary

The meaning of the stop-loss point ultimately is a risk defense line. There is no absolute “perfect” method for setting it; the key is to choose a suitable approach based on your trading style, risk tolerance, and market environment. Whether it’s a simple percentage method, a scientific approach aided by technical indicators, or a dynamic trailing stop, consistent execution is the most important. Remember: stop-loss is not a sign of failure, but a mark of a mature investor’s self-protection.