Mark was looking frustrated when Antony came to meet him for coffee during his break time in the office. Their conversation went on like this.
Antony: Hey Mark, you look frustrated? What happened?
Mark: I can’t understand this market movement. Everything was looking good when the Nifty surged from around 22,000 to 23,500 in just two weeks. But see now, things are looking like turning around again.
Antony: So, if I may make a wild guess, you might have entered the market when the Nifty was around 23,500 or higher and you are at a loss now
Mark: Exactly. Now, I don’t know what to do.
Antony: Didn’t you have any stop-loss when you entered your trade?
Mark: Stop-loss? What is that?
Antony: You don’t know what stop-loss is and you are putting your hard-earned money in the market. That is not at all correct.
Mark: I haven’t heard anyone talking about stop-loss. I only hear people saying buy and sell.
Antony: That’s the blunder that many market participants make. They enter the market without knowing the other side of the coin, which is the danger of making a loss.
Mark: So, can you explain to me what stop-loss is and how it can help me?
Antony: Sure, you should know what it is. As the name suggests, you stop your loss at a certain point and exit a trade when you feel that your view is going wrong.
Mark: Exiting the trade with a loss?
Antony: To be precise, exit with minimum loss.
Mark: How can I use this stop-loss?
Antony: Whenever you enter a trade, you will have a target in your mind to exit and book profits, right?
Mark: Yes, absolutely.
Antony: In the same way, if your trade goes wrong, you should have a price level fixed to exit. At some point you should accept your loss.
Mark: How do I determine that specific point to exit? If I may ask in another way, how to decide the stop-loss level?
Antony: As a rule, your risk/reward ratio, maybe you can call it loss/profit ratio should not be more than 1:2. If you want to be more conservative, you can have 1:3 as your loss/profit or risk/reward ratio
Mark: I do not understand this. Can you give me an example?
Antony: Let me tell you with simple numbers. If you are trading for a profit of ₹100, then your loss should not exceed ₹50. This is for the 1:2 ratio scenario. Similarly for 1:3 ratio, you have to have a stop-loss of ₹33, if you are looking for a profit of ₹100.
Mark: Oh! Like that. But…
Antony: I know, you are not convinced. You wanted to ask what if the price goes up again after touching my stop-loss?
Mark: You stole the words from my mouth.
Antony: It can happen and will happen to all. But please understand that having a stop-loss is a part of risk management strategy to be safe at uncertain times. Let me give you a live example. I bought 100 shares of IndusInd Bank at ₹1,350 in mid-October last year. I spotted a strong support around ₹1,300 and so, I had a stop-loss at ₹1,260. This stop-loss level came on October 24, 2024 and I came out of the trade. So, what was my loss here?
Mark: Hmmm.. ₹1,350 minus ₹1,260, its ₹90 per share. So, you made a total loss of ₹9,000.
Antony: Do you know what happened on October 25,2024, the very next day after I came out of this trade?
Mark: Yeah, the stock fell after their quarterly results announcement to ₹1,050 or something, I don’t remember the exact price.
Antony: Do you know where the share price is now?
Mark: I think it’s somewhere around ₹700.
Antony: Yes, it’s now at ₹685. What would be my loss if I had not had the stop-loss?
Mark: You will be at a huge loss. Let me calculate. ₹1,350 minus ₹685 will be ₹665. You had bought 100 shares. Oh my god, your loss would be now ₹66,500.
Antony: Yes, actually by keeping a stop-loss, I have stopped or restricted my loss to ₹9,000 and saved ₹57,500.
Mark: Yes, now I understand the importance of stop-loss. I will make sure to enter trades with stop-loss. One last question. What if I get a trade opportunity which does not satisfy the condition of 1:2 or 1:3 risk/reward or loss/profit ratio?
Antony: The answer is simple. Do not take that trade.
Mark: Are you serious? I may miss an opportunity.
Antony: There will always be another trade to do. Sometimes, doing nothing is one of the best trade that a trader can do.
Published on April 5, 2025
