Short answer: A stop loss is a pre-set instruction with your broker that automatically closes a position once the price reaches a chosen trigger level, which caps the loss on that trade. You calculate it by choosing that trigger level, most simply as a fixed percentage below your purchase price, or by placing it near a chart level such as a support level or a moving average.
Last reviewed: 9 November 2026
At a glance
| Method or order type | Where the stop goes or what is needed | Key point |
|---|---|---|
| Percentage method | A fixed percentage below the purchase price | Rs 200 at 2% risk gives a stop at Rs 196 |
| Support and resistance | Just below support (long) or just above resistance (short) | Long means buying, short means betting on a fall |
| Moving average | Just below an SMA or EMA (long) or just above it (short) | SMA and EMA are types of moving average |
| Trailing stop-loss | Stays a set percentage or amount below the market price | Moves up as the price rises, never down |
| SL-M order | Trigger price only | Fills at the best available market price |
| SL-L order | Trigger price and limit price | Fills only if a matching order exists at the limit or better |
How do you calculate a stop loss with the percentage method?
The percentage method sets the stop a fixed share of the purchase price below what you paid. Multiply the purchase price by (100 minus the risk percentage), then divide by 100. A Rs 200 purchase with a 2% risk gives a stop at Rs 196, and a Rs 1,000 purchase with a 1% stop gives Rs 990.
Here is a hypothetical example, with invented figures: suppose a share is bought at Rs 500 with a 4% stop. The trigger is Rs 500 × 0.96 = Rs 480. If the price falls to Rs 480, the position closes, and the loss is Rs 20 per share. On 100 shares, that is Rs 2,000 before any charges.
The catch is that the percentage is only a number. It does not look at how the stock has behaved, so a 2% stop can be hit by ordinary daily movement in a volatile stock.
How do support, resistance and moving averages set a stop?
Chart-based methods place the stop near a level the price has respected in the past. For a long position, the stop goes just below a support level, which is a price area where falls have previously stopped. For a short position, it goes just above a resistance level, a price area where rises have previously stalled.
The moving average method works similarly. A moving average is the average of prices over a set number of periods, and an SMA (simple moving average) or EMA (exponential moving average, which gives more weight to recent prices) can serve as the reference. For a long position, the stop sits just below the moving average, and for a short position, just above it.
The catch is that these levels are judgement calls about where to place the line. Two traders looking at the same chart can place the stop at different points, and the result depends on that choice.
What happens when a stop loss is triggered?
Once the trigger is reached, the stop-loss order is executed at the prevailing market price. The fill price can therefore differ from the trigger price, and the loss can be larger than the calculation suggested.
This gap is most likely during volatility, in low-liquidity periods when few buyers or sellers are active, or when the price opens far away from the previous close (a gap opening). A stop protects against a loss, but it does not fix the exit price.
How do SL-M and SL-L orders differ?
An SL-M (stop-loss market) order needs only a trigger price. Once triggered, it executes at the best available market price, so the trade is more likely to be filled but the price may be worse than the trigger.
An SL-L (stop-loss limit) order needs both a trigger price and a limit price. It fills only if a matching order exists at the limit price or better. This gives more control over the fill price, but in a fast fall the order may not execute at all, leaving the position open while the price keeps dropping.
How does a trailing stop-loss move?
A trailing stop-loss moves up as the price rises, staying a set percentage or amount below the market price. It never moves down, so gains are protected, while a fall to the trailing level still triggers a sale.
Here is a hypothetical example, with invented figures: a share is bought at Rs 500 with a 5% trailing stop, so the initial trigger is Rs 475. If the price rises to Rs 600, the trigger moves to Rs 570. If the price then falls to Rs 570, the position is sold, locking in a profit of Rs 70 per share before any charges.
The catch is that a trailing stop can be triggered by a normal pullback, closing the position before a later rise. It also remains subject to the same execution gaps described above.
Frequently asked questions
Does a stop loss guarantee I will lose no more than the trigger amount?
No. Once triggered, the order executes at the prevailing market price, which can differ from the trigger price during volatility, low liquidity or gap openings.
What is the simplest way to calculate a stop loss?
The percentage method is the simplest. You take the purchase price and reduce it by a fixed percentage, so a Rs 200 buy with a 2% risk gives a stop at Rs 196.
What is the difference between an SL-M and an SL-L order?
An SL-M order needs only a trigger price and executes at the best available market price. An SL-L order also needs a limit price and fills only if a matching order exists at that limit or better.
Does a trailing stop-loss ever move down?
The article’s definition is that it moves up as the price rises and stays a set percentage or amount below the market price, so it tracks rising prices and does not fall back.
Sources and last check
Facts in this article were checked against the sources below on 9 November 2026. Rules and figures can change; check the primary source before acting.
- 5paisa.com (broker education)
- kotakneo.com (broker education)
- groww.in (broker education)
- dhan.co (broker education)
- upstox.com (broker education)
- icicidirect.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.