Hard Stop
Contents
Exploring the Concept of Hard Stop in Trading
Understanding Hard Stops
1. Concept: A hard stop serves as a predetermined trigger point to execute an order, typically to sell a security, when specific criteria are met. Unlike a mental stop, which relies on the trader's discretion, a hard stop is inflexible and executed automatically.
2. Implementation: Traders often utilize stop orders to implement hard stops, ensuring that a trade is closed if the price reaches a predetermined level. These orders are usually set as "good till canceled" (GTC) or until filled, prioritizing execution.
3. Alternative: In contrast to hard stops, traders may opt for soft stops, also known as mental stops, where no order is placed in advance. This approach requires traders to manually execute trades based on predetermined price levels.
Special Considerations and Examples
1. Technical Analysis: Hard stops are commonly employed alongside technical analysis to mitigate risks and maximize potential returns. Placing stops just below support levels helps traders avoid premature exits during market fluctuations.
2. Trailing Stop Loss Orders: Trailing stop loss orders offer an alternative to hard stops by adjusting the stop price regularly to account for rising stock prices. This strategy aims to protect profits while allowing for potential further gains.
3. Practical Example: Consider an investor purchasing shares of a company at $10 per share. They may set a hard stop at $10 to limit losses or at $20 after substantial gains, effectively securing profits and minimizing risk.