Why is the stop-loss point so crucial? Risk safeguards every beginner investor must understand

In the investment market, stop-loss points are not optional; they are a mandatory course. Many novice investors enter the market full of confidence but, due to a lack of risk awareness, are ultimately eliminated in market fluctuations. Mastering the method of setting stop-loss points is like installing a safety rope for yourself—allowing you to self-rescue in times of rapid decline.

Understanding the Essence of Stop-Loss Points: Not Surrender, But Self-Rescue

Stop Loss means stopping losses, more precisely, triggering an automatic exit at a preset price to limit the expansion of losses. The stop-loss point is this preset price—when the asset price falls to this level, the system or investor executes a position closure.

Many people misunderstand stop-loss, thinking it’s equivalent to giving up. In fact, stop-loss is the most rational decision. The most frightening thing in investing is not loss itself, but uncontrollable losses.

Three Critical Moments When You Absolutely Need a Stop-Loss Point

First: When the original reason for purchase is invalid

When buying stocks, we usually base our decision on certain logic—such as strong fundamentals or technical support levels. But markets change rapidly, and what was once a correct reason can become wrong the next day. At this point, the stop-loss point acts as a “correction mechanism,” helping you recognize reality in time rather than stubbornly holding on to losses.

Second: When the market falls into irrational panic selling

Global pandemics, geopolitical risks, systemic crashes—these events often cause panic-driven declines, ignoring fundamentals. In such extreme situations, investors without stop-loss points can only watch their capital shrink helplessly. Investors with stop-loss points can exit timely, preserve capital, and seize the next opportunity.

Third: When technical support levels are broken

From a technical perspective, when stock prices break below important support levels, they often accelerate downward. If you still hold a wishful thinking attitude and refuse to stop-loss, you may face significant losses that further expand.

How Heavy Are the Consequences of Not Using a Stop-Loss?

Let’s look at a real case: Suppose you buy 100,000 shares of a stock at $100, totaling $10 million.

Scenario 1: Stop-loss set at a 10% loss ($90)

• Loss amount: $1 million
• Remaining capital: $9 million
• Required increase to break even: only 11% recovery needed

Scenario 2: Refuse to stop-loss, hold until a 50% loss ($50)

• Loss amount: $5 million
• Remaining capital: $5 million
• Required increase to break even: 200% rally needed
• Realistically: most investors would have already lost their nerve at this point, and when prices continue to fall, they tend to cut losses, ending up with over 50% loss

Comparing these two scenarios reveals that the true value of a stop-loss point is that it first reduces losses by timely exiting, and second improves capital efficiency. A smart investor would rather adjust their strategy quickly at a 10% loss, using the remaining funds to seek new opportunities, than wait until a 50% loss and struggle to recover.

Using Technical Indicators to Precisely Locate Stop-Loss Points

Besides simple fixed percentage stops (e.g., stop loss at 10% loss), investors can also leverage technical indicators for more precise stop-loss placement.

Support and Resistance Levels

In a downtrend, when the price hits a certain level multiple times but cannot break through, that level forms resistance. Once the price falls below this critical point, it often signals further decline. The stop-loss can be set just below the resistance level.

MACD (Moving Average Convergence Divergence)

MACD consists of a fast line and a slow line. When the fast line crosses below the slow line (death cross), it’s a clear downward signal. Many investors set stop-loss at this point, as it often indicates trend reversal.

RSI (Relative Strength Index)

RSI values above 70 indicate overbought conditions; below 30 indicate oversold. In overbought environments, there’s a risk of decline, so tightening stop-loss or taking profits proactively is wise.

Bollinger Bands

Comprising upper, middle, and lower bands, when the price crosses below the middle band from above, it’s a sell signal. If the price continues to move between the middle and lower bands, adjusting stop-loss accordingly can prevent further losses.

Three Types of Stop-Loss Methods—Choose the One That Fits You

Active Stop-Loss

This is the most basic method, where the investor manually decides when to close the position. The advantage is flexibility; the downside is the need for constant monitoring and susceptibility to emotional decision-making.

Conditional Stop-Loss

Pre-set a stop-loss price; when the asset reaches this level, the system automatically executes the exit. It’s advantageous because it doesn’t require manual oversight and avoids impulsive reactions. Most trading platforms support this method.

Trailing Stop-Loss (Moving Stop-Loss)

An upgraded version of stop-loss. It automatically raises the stop-loss level as the asset price rises, but keeps it fixed when the price falls. For example, if you set a trailing stop 2% below the current price, when the stock rises from $100 to $120, the stop-loss moves up to $117.6. This way, you participate in upward gains while being able to exit promptly during reversals.

The Synergy of Stop-Loss and Take-Profit Points

Stop-loss and take-profit points should be paired. A complete trading plan includes:

• Entry point: based on what reason you entered
• Stop-loss point: where you cut losses
• Take-profit point: where you lock in gains

These three elements form a “complete trading cycle.” Trading without a stop-loss is like driving on a highway without brakes—it’s bound to go wrong. Equally important is the take-profit point, as markets inevitably end someday; timely profit-taking locks in gains.

Common Mistakes in Setting Stop-Loss Points

Mistake 1: Setting too loose a stop-loss

Some believe stop-loss should be set at a 20-30% loss to avoid being “whipped out.” In reality, this mindset is dangerous because large losses make recovery exponentially harder.

Mistake 2: Setting too tight a stop-loss

Others set stop-loss points too close, such as 2-3%, leading to frequent stop-outs. This can cause you to miss rebounds and increase transaction costs.

The correct approach is to set reasonable stop-loss levels based on your risk tolerance, trading cycle, and capital size, typically between 5-10%.

Final Advice

While setting stop-loss points seems simple, it tests an investor’s rationality and psychological resilience. Many beginners fail not due to lack of knowledge but because of a lack of discipline in executing stop-loss. When losses occur, the natural reaction is hope and praying for a rebound. But this human weakness often turns small losses into major disasters.

Mastering the skill of setting stop-loss points is just the first step; cultivating the habit of executing them is more important. Every time you steadfastly implement a stop-loss, you are building chips for your long-term investment journey. Conversely, every time you avoid stopping losses, you are planting the seeds for a bigger future loss. The market will ultimately reward those who are rational and disciplined.