Decide the exit first
A stop loss is the price at which you have decided, before buying, that the idea was wrong and you will sell. A common place for it is just below the last swing low.
The distance from your buying price to the stop is the risk on each share. If you buy at Rs 500 and the stop is Rs 460, each share risks Rs 40.
Size from the risk
Choose the most you are willing to lose on one trade, often a small share of your capital such as 1% or 2%. Divide it by the risk per share to get how many shares to buy.
With Rs 5,00,000 of capital and 1% at risk, the most you would lose is Rs 5,000. At Rs 40 of risk per share that is 125 shares, about Rs 62,500 at Rs 500.
A wider stop means fewer shares for the same risk. Brokerage, the SEBON fee, DP charges and capital gains tax all reduce what you keep, so a real loss at the stop is a little more than the arithmetic above.
Prices can jump past a stop
A stop is a plan, not a guarantee. A scrip can open below your stop or close at its lower limit for several sessions, and then the sale happens at a worse price than planned. Smaller positions make that less painful.
Practice
- Enter your capital and the share you are willing to risk.
- Enter a buying price and a stop just below a recent swing low on any chart.
- Move the stop further away and watch the number of shares fall.
Where this is used here
This lesson explains how to read prices and the tools here. It is not advice to buy or sell anything.