How to set a stop-loss: six methods compared
There is no single right stop-loss. Each method answers a different question about where a trade is “wrong”. Comparing several levels for the same position is the fastest way to find one that fits the stock.
Key takeaways
- A stop belongs where your reason for holding is invalidated, not at a round number.
- Volatility-based stops (ATR) adapt to each stock; fixed percentages do not.
- Structure-based stops (swing lows, moving averages) follow what the chart is doing.
- A stop order becomes a market order when triggered, so gaps can fill below your level.
Start with the question a stop answers
A stop-loss is the price at which you accept that the trade is not working. Before picking a method, decide what “not working” means for this position: a normal pullback grown too large, a broken trend, or simply more loss than you are willing to take. Each method below encodes one of those definitions.
1. Fixed percentage
The simplest rule: sell if the price falls a set percentage, such as 8%, from the current price. It is easy to understand and apply, but it ignores the stock entirely. On a calm stock 8% may never trigger; on a volatile one it can fire on an ordinary week. PnLock’s Conservative Shield model uses this approach as a predictable baseline.
2. ATR multiple
Average True Range measures a stock’s typical daily range. Placing the stop a multiple of ATR below price, such as 1.5× the 14-day ATR, gives calm stocks tight stops and volatile stocks more room automatically. Bigger multiples mean fewer false triggers but more give-back. PnLock’s Balanced Defender (1.5× 14-day ATR) and Volatility Guard (2× 21-day ATR) are ATR stops.
3. Swing low
A swing low is the most recent level where buyers stepped in and the price turned up. A stop just below it says: if that level breaks, the structure that justified holding has failed. It follows the chart rather than a formula, but in fast markets the last swing low can sit far from price. PnLock’s Momentum Protector uses the 20-day swing low.
4. Moving average
For trend followers, a close below a key moving average such as the 50-day marks a possible trend break. This keeps you in a strong uptrend through normal pullbacks, but the average can be a long way below price after a sharp rally. PnLock’s Crash Hunter model places its level at the 50-day moving average.
5. Chandelier trailing exit
The Chandelier Exit hangs a multiple of ATR below the highest high of a recent window, commonly 3× ATR below the 22-day high, and only ever moves up. It is built for protecting gains in a trend: as new highs print, the exit rises with them. PnLock’s Adaptive Protector is a Chandelier-style exit.
6. Risk-based sizing
The last method flips the question: instead of choosing a stop and accepting whatever risk follows, decide your maximum loss first, then size the position so that the stop distance times your share count equals that budget. It works with any of the methods above and is the most reliable way to keep one bad trade from doing outsized damage.
Stop vs stop-limit orders
A stop order becomes a market order once the price touches your level, so it will usually fill, but on a gap it can fill well below the stop. A stop-limit order becomes a limit order instead: it will not sell below your limit price, but if the price gaps through, it may not fill at all. Choose based on whether certainty of exit or certainty of price matters more to you.
Common questions
What is the best stop-loss percentage?
There is no universal best percentage, because stocks move by very different amounts. A volatility-based method such as an ATR multiple adapts the distance to each stock and is usually more robust than one fixed percentage for everything.
Should my stop-loss be based on my entry price?
Your entry price is useful for sizing initial risk, but once a position has moved, the market does not care what you paid. Anchoring the stop to the current price and recent volatility reflects where the stock actually is now.
How does PnLock help choose a stop-loss?
Profit Lock computes all six model levels for the same position side by side, grades each one from 0 to 100 on noise tolerance, distance, model agreement and freshness, and shows the risk per share. You then place the level you choose with your broker.
Profit Lock
Profit Lock helps investors turn an open position into a clear exit plan. It compares several stop models, grades the quality of each level, and shows the risk before you make a manual decision.