Last updated: June 2026
Stop losses are one of the most argued-about tools in investing. Some investors swear by them, others think they cost money. I have run both approaches with my own money for more than 30 years.
The honest answer is that the right stop-loss strategy depends on three things: your style, your holding period, and how much pain you can sit through before you panic-sell at the bottom anyway. This guide walks through the 5 main stop-loss types, the research that actually backs them, and how to set systematic exit rules in a few minutes.
What a stop loss is, in one paragraph
A stop loss is a pre-set price at which you sell a stock to cap your loss. A 20% stop on a stock bought at $100 sells you out at $80. A trailing stop loss moves the trigger up as the price rises but never down, so it locks in gains automatically.
The exit is decided before you enter. That is what stops you panic-selling at the worst possible moment.
Why stop losses divide investors
The case for is simple. Stop losses cap the maximum loss on a single position, take the emotion out of the sell decision, and the research below shows they improve risk-adjusted returns.
The case against: they can trigger on short-term noise, lock in a loss that would have recovered, and add complexity to a portfolio that is already busy enough.
I have been on both sides. A 20% trailing stop means you have already decided the worst loss you will take. When price hits the stop, you sell. You do not watch it drop another 20%, hope for a recovery, or rationalise it away. That clarity, exit decided before entry, is what separates a system from a hunch.
Critics will say stop losses are a tax on patience. Many stocks that fall 15% to 20% recover within months. In choppy markets, a 20% trailing stop can whip you in and out of the same position twice in a quarter, racking up costs and tax with no gain to show for it.
Both sides have a point. The research below shows where the line falls.
The 5 main types of stop loss
Stop-loss strategies vary in how they trigger, how complex they are, and who they suit. Here is a single-page comparison, then a closer look at each.
| Type | Trigger | Typical setting | Best for | Main weakness |
|---|---|---|---|---|
| Percentage-based | Fixed % below entry | 10% to 25% | Beginners, any broker | Ignores stock's own volatility |
| ATR-based | 2x or 3x 14-day ATR below entry | 2x to 3x ATR | Quants, systematic investors | Needs calculation and back-test |
| Trailing | % below recent high | 15% to 25% | Long-term investors, momentum | Whipsaws in sideways markets |
| Time-based | Fixed holding period | 3, 6, 12 months | Quant strategies with rebalance cycle | Sells winners and losers alike |
| Chart-based | Break of technical support | Variable | Active traders | Subjective, needs technical-analysis skill |
1. Percentage-based stop loss
The simplest one. Sell if the stock falls X% from your purchase price. Typical setting: 10% to 25% depending on how much volatility you can sit with.
Pros: dead simple, no calculations, works on any platform.
Cons: ignores the stock's own volatility. A 15% stop on a small-cap miner will trigger constantly. The same 15% stop on a utility may never trigger.
2. ATR-based stop loss (Average True Range)
Uses the stock's own volatility to size the stop. Usually 2x or 3x the 14-day Average True Range (ATR) below the entry price.
Pros: scales with each stock. Volatile names get wider stops, calm names get tighter ones.
Cons: you have to calculate ATR, the multiplier itself needs back-testing, and a beginner will not get this right on day one. Read more in our advanced trailing stop loss techniques guide.
3. Trailing stop loss
The stop price moves up as the price rises, never down. Gains lock in automatically.
Example: a 20% trailing stop on a stock that rises from $50 to $100 sits at $80. You have locked in $30 of profit without lifting a finger.
Pros: lets winners run while protecting the gain. Simple to set up.
Cons: in a sideways market, a trailing stop can take you out right before the next leg up.
For more detail, see how trailing stop losses work, best trailing stop loss settings, and how to calculate your trailing stop loss correctly.
4. Time-based stop loss
Sell after a fixed holding period (say 12 months) no matter what the price does. Used in quantitative strategies where the rebalance is the exit.
Pros: fully systematic, no emotion, no debate.
Cons: you sell winners and losers on the same day. A stock that has tripled in 11 months gets sold next to one that has done nothing.
5. Chart-based (technical) stop loss
Stops are placed at technical support levels: moving averages, trend lines, previous lows.
Pros: based on actual market structure rather than an arbitrary percentage.
Cons: subjective, needs technical-analysis skill, and support levels often break on heavy volume without warning.
Which stop loss suits which investor
Quantitative or systematic investors. Trailing stop (ATR-based) or time-based. These slot into a screening and rebalancing process without rework. ATR adapts to changing conditions; time-based stops align with quarterly or yearly portfolio refreshes.
Buy-and-hold investors. A wide percentage stop (25% to 30%), or no stop at all if you only hold diversified index funds. Indices rarely collapse. Individual stocks deserve the cap.
Active traders. Chart-based or ATR-based, tighter settings (5% to 15%). You are in and out fast, so structure and volatility matter more than long-term valuation.
Value investors. Consider a fundamental stop. Sell when the thesis breaks (F-Score drops below 3, earnings yield turns negative, debt becomes a problem). Your exit is then tied to the reason you bought, not a chart line. Pair this with the discipline rules in managing investing emotions with a stop loss strategy.
What the research says
Three papers carry most of the weight on this topic.
1. Kaminski and Lo (2014). A trend-following stop rule cut maximum drawdowns by 50% or more, with slightly higher returns. Stops earn their keep during the crashes that matter most.
2. Clare, Seaton, Smith and Thomas (2013). A 10% trailing stop loss improved the Sharpe ratio across several equity markets and asset classes. Sharpe ratio measures return per unit of volatility taken; higher is better.
3. Quant-Investing.com back-tests. We tested combining value investing (high earnings yield plus a Piotroski F-Score quality filter) with a trailing stop. The combination improved risk-adjusted returns, especially during bear markets. The window covered 20 years of historical data including the 2008 financial crisis and the 2020 Covid drawdown.
The headline finding: stop losses earn their keep as risk-management tools. They protect capital in crashes, and capital that does not collapse compounds faster. A portfolio that loses 30% in a bear market recovers in years. A portfolio that loses 50% takes a decade.
For the longer read, see the truths about stop losses that nobody wants to believe and stop loss tips for protecting your portfolio in a crash. For the psychology side, stock drawdowns are normal, be prepared.
See which stocks trigger their stop loss this week
Load any stock from your portfolio into the Quant Investing screener, set a trailing stop at 15%, 20%, or your own percentage, and the screener emails you the day the stop is hit. When you receive an alert for a dividend-paying stock, use the formula above to confirm whether the stop loss has actually been breached after accounting for the dividend, this takes less than a minute.
No credit card needed. Cancels automatically after 30 days.
Setting systematic exit rules in the screener
The Quant Investing screener carries trailing stop loss alerts for every stock you hold. Set the percentage you want, and you get an email the day the stop is hit. You do not have to watch prices.
Pair the alerts with a quarterly or 12-month rebalance and the whole process runs without you. Every cycle the screener shows the best-ranked names. You rotate out of the stops you triggered, redeploy into new entries, and the discipline keeps itself.
When you get an alert for a dividend-paying stock, use the formula in the trailing stop loss calculation guide to confirm whether the stop has actually been breached after the dividend. This takes less than a minute. The alert does not auto-adjust for dividends.
So what (the 80/20)
The 20% that does most of the work. A 20% trailing stop on individual stocks plus a quality filter (Piotroski F-Score of 7 or higher, or earnings yield in the top quartile) gives you most of the protection the research finds. Set it once. Get an alert. Sell when the alert fires.
The 80% that tunes the edges. ATR multipliers, chart-based exits, time-based holding periods, fundamental triggers. Worth knowing about. Not worth losing sleep over until the 20% is in place.
Set stop loss alerts on your portfolio in 5 minutes
Open any stock in the screener, set a trailing stop at the percentage that suits your style, and you are done. The screener emails you the day the stop is hit, so you do not have to watch prices. When the alert is for a dividend-paying stock, use the formula in the trailing stop calculation guide to confirm whether the stop has actually been breached after the dividend, this takes less than a minute.
Try the screener with stop loss alerts
No credit card needed. Cancels automatically after 30 days.
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Frequently asked questions
1. What is a stop loss?
A stop loss is a pre-set price at which you sell a stock to cap the loss on the position. A 20% stop on a stock you bought at $100 sells you out at $80. The decision is made before you enter, so it does not depend on how you feel on the day.
2. What is the best stop loss percentage?
For long-term individual stock investors, the research clusters around 15% to 25% on a trailing basis. 20% is the most-cited setting in the back-tests we run. Tighter than 10% trips you out on normal noise; wider than 30% gives back too much in a real bear market.
3. Do stop losses actually improve returns?
On average, no, they leave returns roughly flat in normal markets. What they improve is risk-adjusted returns and maximum drawdown. Kaminski and Lo (2014) found trend-following stops cut maximum drawdown by 50% or more. Clare, Seaton, Smith and Thomas (2013) found a 10% trailing stop improved the Sharpe ratio across several equity markets and asset classes.
4. What is a trailing stop loss and how is it different from a regular stop loss?
A regular stop loss is fixed at the price you set. A trailing stop loss moves up as the share price rises but never moves down. So a 20% trailing stop on a stock that goes from $50 to $100 sits at $80, locking in $30 of profit. A regular 20% stop on the same stock would still sit at $40.
5. Should buy-and-hold investors use stop losses?
On individual stocks, a wide stop (25% to 30%) protects against the worst case without triggering on normal volatility. On diversified index funds, stops are usually unnecessary because the index itself rarely collapses.
6. Will a 20% trailing stop sell me out at the worst time?
Sometimes, yes. In a sharp V-shaped recovery a 20% stop will trip and the price will recover before you can re-enter. The trade-off is accepting that cost in exchange for avoiding the slow grinding bear market where stocks fall 50% and take a decade to recover. The research is clear that this trade-off is worth taking on average.
7. Does the Quant Investing screener support stop loss alerts?
Yes. Every stock in the screener can be tracked with a trailing stop loss alert. You set the percentage, the screener emails you the day the stop is hit. The alert does not auto-adjust for dividends, so for dividend-paying stocks confirm the breach with the formula in the trailing stop calculation guide before selling.
Further reading
- Don't hold on to losing stocks - the cost of skipping the stop.
- Market crash, how to protect your portfolio - stops in the context of a real downturn.
- Ride your winners for maximum gains - the other side of the same discipline.
About the author
Tim du Toit is the founder of Quant Investing. He has invested his own money for more than 30 years, runs the same value and shareholder-yield strategies in his portfolio every day, and edits two monthly newsletters for self-directed investors (Quant Value for small caps and Shareholder Yield Letter for large caps). BCom, BCom Hons, MBA Finance (Indiana). 16 years in banking and fund management before going independent.
