It gives a false sense of security in cases like this. The biggest losses you want to liquidate will always happen in cases where it's impossible or extremely costly to do so: company has merger announcement overnight while you're short, accounting scandal, bankruptcy, earnings surprise, fat finger order takes all liquidity out of the market. You will end up losing many multiples of your designated loss limit in the bad cases. The only way to prevent massive losses is to size your bets sensibly or insure against tail risk using options ahead of time, of course that comes at a cost.

By bugs and adverse selection I'm assuming you're talking about something like automated market making. For traders like that, a loss limit makes sense because of technology risk. If your order router has a bug like Knight's did, or your data feed gets stuck, you can lose a lot of money very quickly.