Trailing Stop vs Hard Stop

trailing stop hard stop

One of the hardest lessons of investing is to know when to exit a trade. But I note that it’s also the most important one. I always suggest that people make any trade with an exit in mind. Of course, you want to make 90%, 100%, 200% on a stock or position. But you have to ask yourself: How much are you willing to lose? With that in mind, I recommend that traders and investors both use trailing stops or hard stops for their short-term and medium-term positions. Let’s define both. 

A trailing stop is an order type that locks in profits or reduces potential losses as a trail moves in your favor. So, let’s say that you buy a stock for $10.00.

If you set a trailing stop of 10%, this means that the most you can lose is $1 if the stock falls to $9.00 over a period of time. But if the stock rises from $10 to $11, your 10% trailing stop will move higher as the stock price moves in your favor. At $11, a 10% trailing stop would be $1.10 lower – or $9.90. If the stock pulls back to that level, it would execute. 

These stops are very valuable in times of volatility or if you’re speculating on a stock that has strong momentum. We are always looking to ride strong price trends, but trailing stops enable us to protect ourselves against wild days like we saw last Monday. 

A hard stop, however, is a specific price target that you set ahead of time. For example, let’s say that you buy that same $10 stock and set a hard stop of $9. In this case, you would not benefit from a rising price action. You have set your initial risk at a 10% decline, and you’re willing to ride that price into the future. 

With a hard stop, you can always raise it higher. So, if the stock climbs from $10 to $12, you could raise that stop to $11. It’s all a matter of personal preference. 

When you start your position, recognize that these options are available to you through your brokerage. If you have questions, be sure to contact customer service and take the time to exercise these strategies if you plan to be an active trader and investor. 

Checking on Momentum

Finally, I conclude very quickly with an update on market momentum. As I noted yesterday, I am saying goodbye to a dear friend in Dagny the dog today. And I’m effectively locked into hard trailing stops in case we see significant downward moves in the market. 

Market momentum is positive despite today’s sharp downturn. Despite the 1.7% drop in the S&P 500 today and the huge move on the VIX, this profit taking is more closely related to rising bond prices and a pullback in big tech stocks.

Even in the face of this selloff, gold and silver prices continue to pull back while the U.S. dollar is moving higher. I will remain cautious, but I’ll continue to use stops and other hedges today.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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