How to Determine Stop-Loss Levels in the Stock Market?

One of the hardest but most important steps of being a successful investor in the stock market is accepting losses and closing positions at the right place. In the financial world, this vital protection mechanism is called 'Stop-Loss'. Stop-loss is the process of selling a stock at a loss to go to cash when its price falls below a level you defined, to prevent larger losses. It is impossible for every analysis in the stock market to be 100% correct; market conditions can change suddenly. Stop-loss is the most important seat belt protecting your capital from being wiped out.

When determining the stop-loss level, it is necessary to rely on technical analysis data rather than acting emotionally. Randomly set stop levels (such as 'I will sell if it falls 3% below my purchase price') are generally inefficient. The correct way is to place the stop just below the critical support levels on the stock's chart. For example, if the stock is trading above an important horizontal support or the 50-day moving average, the stop-loss level should be placed 1-2% below this support. Because when this support breaks, selling pressure will accelerate and the price will drop much lower.

The biggest reason behind investors' inability to stop-loss is the 'psychology of not accepting loss' and ego. Investors usually cling to a blank hope that the stock will rise again, and try to lower cost (buy more shares to average down) as the price falls. In leveraged or weak companies, this situation leads to locking up all capital and huge losses. Professional traders, on the other hand, see loss as a natural cost of business. Exiting a position with a small loss allows staying liquid to evaluate the capital in other opportunities.

With developing market technologies, 'Trailing Stop-Loss' orders have also become widespread. Trailing stop is the principle of automatically moving the stop level upward as the price rises. For example, you bought a stock at 100 TL and set a 5% trailing stop. When the price rises to 120 TL, your stop level also rises to 114 TL. When the price pulls back from here and falls to 114 TL, your stock is automatically sold and your profit is protected. Trailing stop is a great method to realize profit at the maximum level in uptrends.

In all technical analysis charts and suggestions we share on our Sermaye Borsasi Telegram channel, we clearly specify the stop-loss level as well as the target price. You can also define your stop points by querying the instant support levels of stocks through our depth bot. Learning not to lose in the stock market is as much an art as winning. As Sermaye Borsasi, we advise our investors to make stop-loss discipline a part of their lives.