ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

What is Stop Loss in Stock Trading and a Simple Strategy for Optimum Results using PSAR, ATR, and other indicators

Updated on June 27, 2018

What is Stop Loss?

Stop Loss is basically an automatic sell order: if the stock price falls below this amount, sell that stock! It is simple, but picking the amount can be quite complex.

Stop Loss reduces your management effort considerably, as you don't have to constant worry about the prices and call up your broker (or fire up your online trading tools). However, setting a good stop loss target can be very tricky. if you set it too close to the current price a random fluctuation will cause the stocks to be sold. If you set it too far you'll lose a lot.

A 5% trailing stop loss is often used. What that means is the stop loss is set at 5% below the closing price. However, this may not be an ideal number when the stock is a very volatile one, with large price fluctuations that often exceed 5%.

Let us discuss a strategy as illustration, and then I will show you an even simpler strategy that is easy to calculate.

NOTE: Stock charts produced by AptiStock

PSAR - Parabolic Stop and Reserval

PSAR is a simple way to set stop loss based on the trends. In the sample chart, you can see the prices of AAPL (Apple) from August to November 2009.

The purple dots are the SAR sell points. Notice that they can be above OR below the price curve. When it's below, that's a stop-loss point. When it's above, it's time to go short (i.e. short sell the stop and set the stop-loss at the high point). However, when it comes to an upward trending market it's better to ignore the short-sell signal, and only use the "below" stop-loss signals.

As you can see from the chart itself, you would have sold the stuff several times in the fluctuation between W32 and W36, and again at W39 and W41, had you relied on this signal exclusively. Thus, this signal is NOT that good when the market is "trading" (i.e. going sideways). It is fine in trending markets (going up or down).

AAPL, August - November 2009
AAPL, August - November 2009

ATR -- Average True Range

Another way to calculate the stop-loss is by utilizing the ATR indicator. Buy in when it reaches a new all-time high, then set the stop-loss at 10 ATR (10 Average True Range). Keep updating it only as it reaches new highs. This would have saved you from losing too much. Using the ATR in this case takes into account of volatility of the stock. Volatile stock have large ATR swings, whereas stable stocks have low ATR swings.

ATR, or average true range, is basically the max high of the past X sessions, minus the the min low of the past X sessions. In our need, that would be 10, which is in other words, we want the ATR of the past 10 trading days. Just take a peek should tell you that's not that hard to calculate, and most charters should have the ATR.

Use the ATR as a negative offset to calculate the stop-loss. For example, if the stock price is 100, and ATR is 5, then your stop-loss should be set to 95.

Here is the same chart, with ATR(10) and the calculated stop-loss points calculated. As you can see, this method is actually pretty accurate. ATR remained low until October when it started to rise, so the "offset" is larger. If you had bought during the beginning of August, about about 168, and you had diligently updated your ATR(10) stop-loss you would have cashed out at either 181 or at 200.

AAPL August to November 2009, with ATR(10) and stop-loss points marked
AAPL August to November 2009, with ATR(10) and stop-loss points marked

Stop-Loss Effects on Long-Term Investment

If you plan for stocks long-term, you need to revise your stop-loss targets somewhat.

AAPL is trading at 330 as of January 2011, so if you had indeed sold much of it back in 2009 at 200 you'd have missed the 50% profit.

Consider multiplying your "offset" by a certain modifier, such as 150% if you are considering longer-term investments. If the ATR(10) says 5, you may want to use 7.5 instead. This will have the effect of canceling out the random noises, but also means if the stock tanks you will lose a bit more.


Stop-loss is a tool that is often under-utilized or misused by common investors because while it is easy to understand, it is very difficult to pick a good number. The two techniques above can be combined to form an effective stop-loss calculator without too much math or effort. Good luck.


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
    ClickscoThis is a data management platform studying reader behavior (Privacy Policy)