Hard Stop
Candlefocus EditorA hard stop is predefined by the trader and allows them to exit their position if the price of the markets goes beyond a certain limit. This type of order is usually placed with a broker on a specific security. A stop order is an order placed with a broker to buy or sell a stock or security at a certain price. When the security’s price reaches the trigger point defined in the order, it is automatically executed.
Hard stops are often used by traders looking to limit their losses on a particular position or protect profits on a profitable trade. By setting this order ahead of time, traders can limit their losses if the market moves against them. Once the hard stop price is met, the order is automatically placed and executed without the trader having to take action.
The opposite of a hard stop is a soft stop, or a mental stop. With this type of stop, the trader does not enter the order into the broker’s platform. Instead, they simply remember the price they want to exit their position at and they manually make the trade when they reach the desired exit point. Although this is a less commonly used tactics than a hard stop, it has some advantages, like avoiding a market influence on the stopping price since the order is not actually entered into the market. Also, human errors in setting the exit point can be avoided if the order is manually entered into the broker’s platform.
Overall, for investors who are serious about their finances, a hard stop is an essential element of their trading strategy. By having one in place, it limits your losses if the market moves against you, which helps ensure that your losses are kept to a minimum. Although, it is important to remember that hard stops can't protect against every market change and they should be used in conjunction with a comprehensive trading plan.