Glossary / Risk

Stop Loss

A stop loss is a predefined exit level or rule used to limit downside when a position moves against the plan. It can be entered as an order, tracked manually, or defined as a thesis-based exit condition.

Types of stops

• Price-based stop: exits if the stock reaches a specific price level.
• Volatility-based stop: allows more room for assets that normally move around more.
• Thesis-based stop: exits when the business reason for owning the stock is no longer valid.
• Time-based stop: exits if the expected catalyst does not happen within the planned horizon.

Why it matters

A stop loss can prevent one wrong idea from dominating a portfolio. It also reduces emotional decision-making because the exit rule is set while the investor is still calm.

Limitations

Stops are not perfect. Prices can gap through stop levels, short-term volatility can trigger exits before a thesis plays out, and overly tight stops can create unnecessary churn. A stop should fit the asset, the time horizon, and the research plan.