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Stop Loss Strategies - Fixed, Trailing, and Time-Based

· 7 min read
Karthik
Karthik
Founder, TradeLyser

"Cut your losses short"

Every trader knows this rule.

But HOW do you cut them short?

Today, I'll show you the three main stop loss strategies and when to use each.

What Is a Stop Loss?​

Definition: A predetermined price level where you exit a losing trade to limit your risk.

Purpose:

  • Limit losses
  • Preserve capital
  • Remove emotion from exits
  • Allow for systematic trading

Key principle: Set it before you enter the trade.

Strategy #1: Fixed Stop Loss​

How It Works​

Set a fixed price level below (long) or above (short) your entry.

The stop never moves.

Example:

  • Entry: ₹1,000
  • Fixed Stop: ₹980
  • Risk: ₹20 per share
  • Stop stays at ₹980 regardless of price movement

Advantages​

1. Simple:

  • Easy to understand
  • Easy to execute
  • No decisions needed

2. Predictable:

  • Know exact risk before entry
  • Easy to calculate position size
  • Clear risk management

3. Psychological:

  • No second-guessing
  • No emotional decisions
  • Follows the plan

Disadvantages​

1. No Profit Protection:

  • Stop doesn't move up with price
  • Can give back all profits
  • No benefit from favorable moves

2. Whipsaws:

  • Price may hit stop then reverse
  • Common in volatile markets
  • Can be frustrating

3. No Optimization:

  • Same stop regardless of conditions
  • Doesn't adapt to market
  • May be too tight or too wide

When to Use Fixed Stops​

Best for:

  • New traders (simple)
  • Volatile markets (avoid whipsaws)
  • Short-term trades (intraday)
  • Testing new strategies

Example Setup:

Entry: ₹2,500
Fixed Stop: ₹2,450 (2% below entry)
Target: ₹2,600 (4% above entry)
R:R = 1:2

Strategy #2: Trailing Stop Loss​

How It Works​

Stop moves in your favor as price moves favorably.

Stop never moves against you.

Example:

  • Entry: ₹1,000
  • Initial Stop: ₹980
  • Price moves to ₹1,020
  • Stop moves to ₹1,000 (breakeven)
  • Price moves to ₹1,040
  • Stop moves to ₹1,020
  • Stop trails behind price

Types of Trailing Stops​

1. Percentage Trailing Stop​

Stop trails by fixed percentage.

Example:

  • Entry: ₹1,000
  • Trail by: 2%
  • Price ₹1,020 → Stop ₹1,000
  • Price ₹1,040 → Stop ₹1,020
  • Price ₹1,060 → Stop ₹1,040

Advantage: Simple to calculate
Disadvantage: May be too tight or too wide

2. Point-Based Trailing Stop​

Stop trails by fixed points.

Example:

  • Entry: ₹1,000
  • Trail by: ₹20
  • Price ₹1,020 → Stop ₹1,000
  • Price ₹1,040 → Stop ₹1,020
  • Price ₹1,060 → Stop ₹1,040

Advantage: Consistent risk
Disadvantage: Doesn't adapt to volatility

3. ATR-Based Trailing Stop​

Stop trails by ATR (Average True Range).

Example:

  • Entry: ₹1,000
  • ATR: ₹15
  • Trail by: 1.5 × ATR = ₹22.50
  • Price ₹1,022.50 → Stop ₹1,000
  • Price ₹1,045 → Stop ₹1,022.50

Advantage: Adapts to volatility
Disadvantage: More complex

Advantages of Trailing Stops​

1. Profit Protection:

  • Locks in profits as price moves favorably
  • Reduces give-back of gains
  • Maximizes winning trades

2. Trend Following:

  • Stays with the trend
  • Exits when trend changes
  • Captures big moves

3. Emotional Relief:

  • No need to decide when to exit
  • Automatic profit protection
  • Reduces stress

Disadvantages of Trailing Stops​

1. Premature Exits:

  • May exit during normal pullbacks
  • Can miss continuation moves
  • May trail too closely

2. Complexity:

  • More complex than fixed stops
  • Requires monitoring
  • Can be confusing

3. Whipsaws:

  • Still subject to whipsaws
  • May exit and re-enter frequently
  • Can increase trading costs

When to Use Trailing Stops​

Best for:

  • Trend-following strategies
  • Swing trading
  • Experienced traders
  • Trending markets

Example Setup:

Entry: ₹2,500
Initial Stop: ₹2,450
Trail by: ₹30
Target: Let trailing stop handle exit

Strategy #3: Time-Based Stop Loss​

How It Works​

Exit the trade after a predetermined time period.

Regardless of profit or loss.

Example:

  • Entry: ₹1,000
  • Time Stop: 2 hours
  • Exit after 2 hours regardless of price

Types of Time Stops​

1. Fixed Time Stop​

Exit after fixed time period.

Example:

  • Intraday trade
  • Time stop: 4 hours
  • Exit after 4 hours

2. Session-Based Stop​

Exit at end of trading session.

Example:

  • Day trade
  • Exit at 3:30 PM

3. Event-Based Stop​

Exit before specific events.

Example:

  • Exit before earnings announcement
  • Exit before Fed meeting
  • Exit before expiry

Advantages of Time Stops​

1. Discipline:

  • Forces decision-making
  • Prevents over-holding
  • Reduces analysis paralysis

2. Risk Management:

  • Limits time exposure
  • Reduces overnight risk
  • Prevents forgotten positions

3. Simplicity:

  • Easy to understand
  • Easy to execute
  • No price monitoring needed

Disadvantages of Time Stops​

1. Arbitrary:

  • May exit at wrong time
  • Doesn't consider market conditions
  • May cut winners short

2. Missed Opportunities:

  • May exit before move completes
  • Doesn't adapt to market
  • May miss continuation

3. No Profit Optimization:

  • Doesn't maximize gains
  • Doesn't protect profits
  • May give back gains

When to Use Time Stops​

Best for:

  • Intraday trading
  • News-based trades
  • Event-driven strategies
  • Risk management

Example Setup:

Entry: ₹2,500
Stop Loss: ₹2,450 (backup)
Time Stop: 2 hours
Target: Let time stop handle exit

Combining Stop Loss Strategies​

Multi-Layer Approach​

Layer 1: Fixed Stop (Risk Management)

  • Set at 2% below entry
  • Never moves
  • Protects against catastrophic loss

Layer 2: Trailing Stop (Profit Protection)

  • Activates after +1R profit
  • Trails by ₹30
  • Protects profits

Layer 3: Time Stop (Discipline)

  • Exits after 4 hours
  • Prevents over-holding
  • Forces decision

Example:

Entry: ₹2,500
Fixed Stop: ₹2,450 (2% risk)
Trailing Stop: Activates at ₹2,550 (+1R)
Time Stop: 4 hours

Conditional Stops​

Use different stops based on conditions:

Trending Market:

  • Use trailing stops
  • Let winners run
  • Cut losers quickly

Ranging Market:

  • Use fixed stops
  • Take profits quickly
  • Avoid whipsaws

Volatile Market:

  • Use wider stops
  • Add time stops
  • Reduce position size

Real Examples​

Example #1: Fixed Stop Success​

Setup:

  • Entry: RELIANCE @ ₹2,500
  • Fixed Stop: ₹2,450
  • Target: ₹2,600

Result:

  • Price hits ₹2,600
  • Profit: ₹100 per share
  • Fixed stop worked perfectly

Example #2: Trailing Stop Success​

Setup:

  • Entry: TCS @ ₹3,000
  • Initial Stop: ₹2,940
  • Trail by: ₹60

Result:

  • Price moves to ₹3,200
  • Stop trails to ₹3,140
  • Price reverses to ₹3,100
  • Exited at ₹3,140, profit ₹140

Example #3: Time Stop Success​

Setup:

  • Entry: INFY @ ₹1,500
  • Time Stop: 2 hours
  • Backup Stop: ₹1,470

Result:

  • After 2 hours, price ₹1,480
  • Exited at ₹1,480, small loss ₹20

Example #4: Stop Loss Failure​

Setup:

  • Entry: HDFC @ ₹1,600
  • Fixed Stop: ₹1,568
  • Target: ₹1,680

Result:

  • Price hits stop at ₹1,568
  • Loss: ₹32 per share
  • Price then moves to ₹1,700
  • Stop was too tight

Common Stop Loss Mistakes​

Mistake #1: No Stop Loss​

Wrong: "I'll hold until it comes back"
Right: Always set a stop before entering

Mistake #2: Moving Stops Against You​

Wrong: "I'll give it more room"
Right: Never move stops against your position

Mistake #3: Too Tight Stops​

Wrong: 0.5% stop in volatile stock
Right: Use appropriate stop distance

Mistake #4: Too Wide Stops​

Wrong: 10% stop for 2% target
Right: Maintain reasonable R:R

Mistake #5: Emotional Stops​

Wrong: Moving stops based on fear
Right: Set stops based on technical levels

Stop Loss Best Practices​

Practice #1: Set Before Entry​

Always set stop before entering trade
Never enter without knowing your exit

Practice #2: Use Technical Levels​

Set stops at:

  • Previous swing lows
  • Support/resistance levels
  • Moving averages
  • Not arbitrary percentages

Practice #3: Consider Volatility​

High volatility = Wider stops
Low volatility = Tighter stops
Use ATR to determine appropriate distance

Practice #4: Test Different Approaches​

Try different stop strategies
Track which works best for you
Optimize based on results

Practice #5: Automate When Possible​

Use broker's stop loss orders
Set alerts for stop levels
Remove emotion from execution

The Bottom Line​

Stop losses are essential for survival.

Choose the right strategy:

  • Fixed stops: Simple, predictable
  • Trailing stops: Profit protection, trend following
  • Time stops: Discipline, risk management

Best approach: Combine multiple strategies

Remember: The best stop loss is the one you actually use.

Take Action Now​

Today:

  1. Review your current stop loss strategy
  2. Identify which type you use
  3. Consider if it's optimal

This Week:

  1. Test a different stop strategy
  2. Track results
  3. Compare performance

This Month:

  1. Optimize your stop loss approach
  2. Implement best practices
  3. Measure improvement

👉 Set Up Automated Stop Losses in TradeLyser
👉 Download: Stop Loss Strategy Guide
👉 Next: The Truth About Win Rate vs Profit Factor

What stop loss strategy do you use? What's your biggest challenge? Share below.