Hard Stop Order Type

Hard Stop Definition

A hard stop is a protective order placed in the market to close a position.  Unlike other stops, which traders might move as the stock goes against them, a hard stop is an order that is placed and does not change.  This order type is a key component of strict trading plans, where traders honor their initial plan with unwavering devotion.  A hard stop order is only executed when a given price level is triggered.

When to Use Hard Stops

Hard stops are easier to enter as a protective measure, because it is much easier to identify a maximum pain level before entering a trade.  However, hard stops are tough to place when a trader is in a winning position.  Greed will often lead to a belief that there is always more in a trade.  This is why it is important for a trader to place a hard stop to lock in profits.

Hard Stop Chart Example

Below is a chart of the Dow Jones.  When the Dow started breaking down in mid-September, it had a 900 point sell off in roughly 4 days to the 10,500 level.  There was a quick bounce back up to 11,500 but there was a clear line in the sand at 10,500.  A trader would have been smart to place a hard stop order below 10,500 because it would have avoided an additional 25% loss.