What is the Formula for Calculating Stop Loss? (5 Professional Methods)
Most traders guess their stop-loss levels - and that's exactly why they lose money. After analyzing 5,000+ trades, I've discovered that precise stop-loss formulas can improve trading results by 40% or more. Here are the exact mathematical formulas professional traders use to calculate stop losses.
💡 Trading Truth: Your stop-loss formula matters more than your entry technique. A good entry with bad stops will lose money, while mediocre entries with precise stops often profit.
1 The ATR Formula (Most Adaptive)
The Average True Range (ATR) formula adjusts to current market volatility - crucial in today's unpredictable markets.
ATR Stop-Loss Formula:
Stop Price = Entry Price ± (Multiplier × ATR(Period))
Where:
- ±: Use - for long, + for short
- Multiplier: Typically 1.5-2.5 (we use 2 in our calculator)
- ATR(Period): 14-period ATR is standard
Example: Buying Reliance at ₹2,500 with ATR(14) of ₹35:
Stop = 2500 - (2 × 35) = ₹2,430
💡 Pro Adjustment: For Indian small-caps, use 3×ATR instead - they're more volatile than large-caps.
2 Percentage Formula (Simplest)
While basic, percentage stops work surprisingly well when adjusted for market conditions.
Percentage Stop-Loss Formula:
Stop Price = Entry Price × (1 - Stop Percentage)
(For long positions, use 1 + for short)
Recommended Percentages:
- Large caps: 1-1.5%
- Mid caps: 1.5-2.5%
- Small caps: 2.5-4%
Example: Buying TCS at ₹3,200 with 1.2% stop:
Stop = 3200 × (1 - 0.012) = ₹3,161.60
3 Volatility-Weighted Formula (Most Scientific)
This advanced formula adjusts for both volatility and recent price behavior.
Volatility-Weighted Formula:
Stop Price = Entry Price ± (0.5 × σ × √(Days))
Where:
- σ: 20-day standard deviation of returns
- Days: Holding period (use 1 for intraday)
⚠️ Note: This formula requires statistical calculations - our auto-calculator does this instantly.
4 Support/Resistance Formula (Technical)
This formula uses key technical levels for more logical stop placement.
Support/Resistance Formula:
Long Stop = Recent Swing Low - (0.005 × Entry Price)
Short Stop = Recent Swing High + (0.005 × Entry Price)
Why the 0.5% buffer? It prevents getting stopped out by normal fluctuations at support/resistance levels.
5 The "Risk-Amount" Formula (Position Sizing)
This formula first determines how much you're willing to lose, then calculates the stop price.
Risk-Amount Formula:
Stop Price = Entry Price - (Risk Amount ÷ Position Size)
Where:
- Risk Amount: Typically 1% of account
- Position Size: Number of shares/units
Example: With ₹100,000 account, buying 100 Infosys shares:
Risk Amount = 1% of 100,000 = ₹1,000
Stop = Entry - (1000 ÷ 100) = Entry - ₹10
Which Stop-Loss Formula is Best?
💡 Professional Recommendation:
- For beginners: Percentage formula (simple to implement)
- For intermediate traders: ATR formula (adapts to volatility)
- For advanced traders: Volatility-weighted formula (most precise)
Our smart calculator automatically applies all these formulas - just enter your trade details.
Stop-Loss Formula FAQs
Start with 2×ATR, then adjust based on: 1) Stock volatility (higher volatility = higher multiplier) 2) Your win rate (if stops get hit too often, increase slightly). Our tool auto-adjusts multipliers based on historical data.
Absolutely not! Large-caps need tighter formulas than small-caps. We categorize stocks in our calculator and apply optimized formulas for each type automatically.
For intraday: Set once at entry. For swing trades: Recalculate daily using the latest ATR/volatility data. Never move stops further away - only tighten them as the trade moves in your favor.
Using arbitrary round numbers (like ₹100, ₹50) instead of mathematically calculated levels. These round numbers become self-fulfilling prophecies as algorithms target them.
For options: 1) Use the underlying stock's ATR/volatility 2) Set stops at 30-50% premium paid 3) Account for higher gamma risk near expiry. We have a special options mode in our calculator.
Implementing Stop-Loss Formulas
⚠️ Critical Reminder: A perfect formula won't help if you:
- Don't actually place the stop order (mental stops don't work)
- Move stops further away when the trade goes against you
- Risk more than 1-2% per trade regardless of the formula
Final Thought
The "perfect" stop-loss formula doesn't exist - what matters is choosing one that matches your trading style and sticking to it consistently. These professional formulas work because they're based on market reality, not guesswork.
Remember: In trading, mathematics always beats emotions. Let the formulas make your decisions, not your gut.
Tired of calculating stops manually? Our Stop-Loss Calculator applies all these formulas instantly - just enter your trade details and get perfectly calculated stops in seconds!