How should you set your stop-loss? Essential risk control tips you must understand before investment losses

In stock and asset trading, stop-loss is the most overlooked yet crucial skill for investors. Many beginners fail to set reasonable stop-loss points, leading to small losses turning into big ones, and ultimately losing everything. Today, let’s talk about why stop-loss is so important and how beginners should correctly set stop-loss points.

What exactly is a stop-loss point? Why is it indispensable?

A stop-loss is stopping the loss, simply put, it means actively accepting a loss and exiting the position when your investment judgment is wrong or market conditions change, preventing losses from expanding further. The stop-loss point is the specific price at which you decide to execute this action.

It sounds simple, but many people just can’t do it. Why? Because of human nature—no one likes admitting defeat. But this mindset often turns small losses into large ones.

The three core functions of stop-loss

First, correcting incorrect judgments

Sometimes, our reasons for buying an asset are wrong from the start. Setting a stop-loss point is like giving yourself a chance to correct course. When the price drops to your set level, the system will force you to close the position, avoiding deeper losses in the wrong direction.

Second, responding to market sudden changes

Markets are unpredictable; what seems right today may not be tomorrow. Especially during market panic (like global emergencies) causing irrational sell-offs, having no stop-loss is like walking on the edge of a cliff—you could fall at any moment. From a technical perspective, when an asset’s price breaks below an important support level, it often continues to decline sharply. Without a stop-loss, it’s basically self-destructive.

Third, improving capital utilization efficiency

An intuitive example: using $10 million to buy Apple stock. If you don’t set a stop-loss and the stock drops 50%, your account becomes $5 million. To break even, you’d need the stock to rise from $50 to $100—a 200% increase. That might take years. But realistically, most people panic after losing over 50%, and end up losing more than 90%.

Conversely, if you stop loss at a 10% loss, leaving $9 million to recover $1 million, you only need an 11% return on investment. That’s the power of stop-loss—using discipline to improve efficiency.

How should beginners determine their stop-loss points?

There are many ways to set stop-loss points. The simplest is to set a percentage loss, like stopping at a 10% decline. But a more precise approach is to combine technical indicators.

Common technical indicator-based stop-loss methods

Support and resistance levels

In a downtrend, if the asset price repeatedly bounces off a certain level without breaking through, that forms resistance. You can set your stop-loss just above the resistance level. Once it breaks below, there’s a risk of accelerated decline.

MACD indicator

MACD is a trend indicator. When the short-term line crosses below the long-term line, forming a death cross, it’s a clear bearish signal. You can set your stop-loss below this point.

Bollinger Bands (BOLL)

Bollinger Bands consist of an upper, middle, and lower band. When the price breaks down from the upper or middle band, it indicates weakening momentum and a sell signal. If the price continues to move between the middle and lower bands, your stop-loss should adjust accordingly.

Relative Strength Index (RSI)

RSI helps determine overbought or oversold conditions. When RSI exceeds 70, it’s overbought (a sell signal); below 30, it’s oversold. Setting stop-loss points during overbought conditions can help avoid getting trapped at high levels.

How to operate stop-loss? Three methods for you to choose from

First: Active stop-loss

The most direct method—manual closing of positions. But this requires constant monitoring of the market and quick reactions, suitable for experienced investors with time.

Second: Conditional stop-loss

This is the most commonly used method. You set a price when placing an order, and once the market reaches this level, the system automatically closes the position. No need to watch the screen constantly, saving effort and worry.

Third: Trailing stop-loss

Also called a moving stop-loss. It automatically adjusts the stop-loss level as the price rises, locking in profits while protecting the principal. For example, you can set a 2-point loss limit, and the stop-loss line will follow the price movement, moving upward as profits increase, minimizing losses.

Don’t let stop-loss points become decoration

The key to stop-loss isn’t whether you know how to set it, but whether you have the discipline to execute it. Investors with good mindset treat stop-loss points as part of their trading plan and won’t change their plan due to short-term losses.

Remember: Timely small losses are far better than delayed large losses. Use support and resistance levels, MACD, RSI, Bollinger Bands, or other technical indicators to find reasonable stop-loss points, then stick to them. This is the correct approach to risk management.