Trading in the markets is more about managing risks than running after profits. Once the risk is contained, profits accrue automatically.
When you decide to invest in a stock, it is based on certain fundamental or technical reasons. Many times, this justification itself can be flawed and the market can go against your action. Protective stops force an exit and thus help protect capital.
Stoplosses vary depending on your timeframe. The same stock will have vastly different stoploss levels for a day trader, futures trader, swing trader, short term or long term investor.
Incidentally, the word "long term" means different things to different people. For some people, it could be 6 months whereas for someone else it could be 5 years. On the other hand, many investors become long term investors out of choice!
Defining stoplosses is not easy as many people have seen a stoploss gets triggered and the stock subsequently rallies. There is no quick fix solution for this but a thorough knowledge of charts and daily study does help substantially.
You can also use 'stops' to define entry levels (long or short).
Trailing stoplosses: this is nothing but the stoploss level you change everyday in direction of the trend.
Trailing stoplosses help you capture the real gains. Since one does not know with certainity how much stock can rally, it makes sense to simply increase the stoploss everyday till it gets trigerred.
Stop loss order levels need to be technically consistent, otherwise they will cost you money. Arbitrary levels are likely to be activated by the normal cycle. Base your stop losses on technical levels, such as:
I use the most recent "significant" support or resistance as the stoploss. The keyword here is the word "significant". For example, for short term trades I use a 5% change for determining peaks and troughs (you need sophisticated charting software for this). This is highly accurate and extremely reliable.
NOTE as long as the trend is up, you will always make money. Sometime or the other, the broader trend must and will reverse. No one knows when the trend will reverse and hence the stoploss is important.
Never make the mistake of dreaming that sometime or the other, the stock will rally and you will recover your investment. This may take years or a lifetime. Just to remind, there are people who have bought ACC at Rs.8000/- or HIMACHALFUT at Rs.2000/-...they are still holding this in the fond hope that they will recoup their losses!