Let’s face it—no one likes being wrong… especially when it involves losing money.
But the simple fact of investing is that you will get it wrong sometimes.
The important thing is knowing how to manage downside risk.
That’s where stop losses come in. As an investor, stop losses are one of the most essential tools for long-term success.
In this article, we’ll break down what stop losses are, how to use them effectively, and a real-world example of how a stop loss saved us from even bigger losses in our Dollar Stock Club portfolio.
Let’s start with the basics…
What are stop losses—and how do they work?
A stop loss is a predetermined point at which you exit a position to limit your losses. Rather than reacting emotionally when a stock moves against you, a stop loss ensures you stick to your plan and avoid devastating drawdowns.
There are different types of stop losses you can use you can use, depending on how much control you want over the exit:
1. Hard stop
This is the most common type. You set a price or percentage at which you commit to selling your position.
Example: If you buy a stock at $10 and place a 15% hard stop, you’ll exit the position if it falls to $8.50. It’s simple and effective—once the stock hits that level, you sell.
2. Trailing stop
A trailing stop “follows” the stock as it rises. You define a set percentage or dollar amount below the current price. If the stock climbs, your stop moves up with it. If it reverses and hits the trailing stop, you exit.
Example: Let’s say you buy a stock at $25 with a 20% trailing stop. If it rises to $30, the stop moves to $24. A drop from $30 to $24 triggers the sale.
Using stop losses helps you avoid:
- Emotional decision-making
- Justifying a bad trade
- “Averaging down” into deeper losses
- Holding a loser that drains your portfolio (and your energy)
Put simply, stop losses aren’t about being perfect. They’re about staying disciplined, managing risk, and protecting capital so you can keep playing the game.
WW International: A lesson in discipline
In September 2023 in The Dollar Stock Club, we recommended shares of WW International (WW) at $9.70 with a 15% hard stop.
Our thesis included a promising new CEO, new digital tools, cost-cutting, and a growth opportunity via the weight-loss drug market.
For a brief moment, the trade looked good. The stock rallied to $12.50—but then quickly reversed. Our stop was triggered when the stock dropped to $7.98, locking in an 18% loss.
Painful? Sure. But it could’ve been much worse.
After the stop loss was triggered, the stock briefly rebounded—tempting some to hold on or re-enter the trade. But we stuck to our plan. Fast-forward to 2024: The stock had fallen an additional 93%, closing as low as $0.55 per share.
By honoring our stop loss, we avoided a catastrophic loss that could have severely impacted our portfolio—and peace of mind.
The bottom line
Every investor will have losing trades. What matters most is how you handle them.
Having an exit strategy before you enter a position is essential. Whether you prefer a hard stop or trailing stop, the key is to set it in advance—and stick to it.
As the WW International trade shows, it’s not about being right all the time. It’s about being disciplined enough to admit when you’re wrong, protect your capital, and move onto the next opportunity.
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