What Is Stop Loss in Stocks? Why Do Many Traders Still Overlook This Important Tool

The Story of “Burned” Accounts: Lack of Stop Loss or Using It Wrong?

Have you ever wondered why your win rate is high, but by the end of the month, your account still suffers losses? This is a common issue among thousands of new traders. The main reason is not ineffective strategies but poor risk management—specifically, not using or misusing Stop Loss.

Stop Loss (SL) is a tool to protect your account from unpredictable market fluctuations. However, many traders either ignore it completely or set it too close to the entry point, causing it to be triggered prematurely. The result? More losses than profits, even though the number of winning trades is higher.

What Is a Stop Loss in Stocks? How Does It Work?

Stop Loss is an automatic order to sell/close a position when the price reaches a level you set in advance, helping to limit losses on each trade.

For example: You buy 10 Tesla (TSLA) shares at $300 per share. You plan that if the price drops to $275, you will cut your losses to avoid further losses. Instead of constantly monitoring the price, you just set a Stop Loss once. When the price hits this level, the order executes automatically, and you sell all 10 shares without intervention.

$275 Why Is Stop Loss So Important?

The market always carries risks; no trade is 100% certain, no matter how many technical indicators you use. Every trade has the potential for profit and loss. Stop Loss acts as a “shield” to protect your capital from major failures and helps you avoid impulsive decisions made in panic.

Warren Buffett Doesn’t Use Stop Loss, So Why Do We Need to?

This is a question many traders ask. In reality, professional traders who do not use Stop Loss often have very specific conditions:

• They have hedging strategies ###giao dịch phòng hộ( to protect their positions
• They use little or no leverage, so each trade does not carry excessive risk
• They invest long-term )for decades(, not short-term trading like most of us

Taking Warren Buffett as an example: he buys stocks to hold for decades, not to profit from short-term price fluctuations. Therefore, Stop Loss is unnecessary for him. But if you trade Forex, short-term stocks, and use leverage, then Stop Loss is mandatory, not optional.

The Number Doesn’t Lie: Statistics on Stop Loss in Trading

According to statistical studies in the forex market, a hard truth is:

Most traders have a higher win rate than loss rate, but their net profit is still negative. Why? Because they lose more money on each losing trade than they earn on each winning trade.

For example:

• Winning trade: earns )- Losing trade: loses $100

Even if you win 60% of your trades, overall, you still incur losses because each losing trade is too large.

Simple Yet Effective Tip: Risk/Reward Ratio

To address the above issue, apply this rule:

The Take Profit order must be equal to or greater than the Stop Loss order

If you set a Stop Loss of 50 pips, you should set a Take Profit $300 take profit( of at least 50 pips. This is called a 1:1 risk/reward ratio.

With this ratio, if you win 51% of your trades, you can generate a net profit. In practice, most professional traders use a 1:2 or 1:3 )risk to reward( ratio, rarely exceeding this level.

How to Place an Effective Stop Loss?

Many people face the problem: “I also use Stop Loss, but the market just triggers it and then starts the trend I predicted!”

This happens because:

• You haven’t accurately identified the market trend
• You set the Stop Loss too close to the entry point
• Your technical analysis has issues

) Strategy 1: Use Moving Averages ###Moving Average(

Step 1: Identify the current trend )uptrend or downtrend(

Step 2: Enable the appropriate MA indicator

• Short-term trading: use MA 20
• Medium-long-term trading: use MA 50

Step 3: Place the Stop Loss at a level the price should not cross

If you open a long position )Long( and the market is in an uptrend, the Stop Loss can be placed below the MA line. Conversely, if you short )Short(, the Stop Loss should be above the MA line.

) Strategy 2: Use ATR ###Average True Range(

ATR measures the average volatility of the market, helping you set a Stop Loss that isn’t too tight to the entry price.

Step 1: Enable the ATR indicator on the chart, note the current ATR value

Step 2: Determine the multiplier )usually 1, 2, or 3 depending on the timeframe(

Step 3: Apply the formula

• If buy )Long(: Stop Loss = nearest Swing High - )ATR × multiplier(
• If sell )Short(: Stop Loss = nearest Swing Low + )ATR × multiplier(

Example: ATR = 6 pips, choose a multiplier of 2, so the Stop Loss will be 12 pips )6 × 2( away from the entry point, not too close to be triggered by noise, nor too far to increase risk.

How to Set Up a Stop Loss: Specific Steps

) Step 1: Choose Asset and Identify Trend

On the chart, select a suitable timeframe ###e.g., 30 minutes(. Enable the 20 MA line for observation. If the price is above the MA, indicating a potential reversal, consider short selling.

) Step 2: Activate ATR and Determine Risk/Reward Ratio

Find the ATR indicator on your tool. Suppose ATR = 0.0006 ###equivalent to 6 pips(, decide to use a 1:2 ratio.

Find the nearest Swing Low )local bottom( on the chart. Then:

• Stop Loss = 12 pips above this point )6 pip × 2(
• Take Profit = 24 pips above this point )6 pip × 4(

) Step 3: Place Sell Order with Stop Loss and Take Profit

Enter the sell price on the chart, then set the Stop Loss ###above the sell price( and the Take Profit )below the sell price(. The order will execute automatically when the targets are reached.

Besides Stop Loss, What Else?

Stop Loss is the most basic risk management tool, but not the only one. Some additional tools you should know:

• Trailing Stop: Moves along with favorable price movement, helping to “lock in profits” as the market moves in your favor
• Limit Order: Allows you to set a specific price to execute the order instead of accepting the market price

Conclusion

Stop Loss in stocks is an essential tool, not optional, if you want sustainable trading. It’s not to prevent all losses )because the market always carries risks(, but to control losses on unlucky trades.

When you combine proper Stop Loss placement with a reasonable Risk/Reward ratio )at least 1:1(, even winning just 51% of your trades can yield a net profit. That’s why most professional traders use it—not because it’s perfect, but because it works.

Today, if you haven’t developed the habit of setting Stop Loss, start now. You will notice a difference in your account.