Hard Stop

A hard stop is a kind of stop orders which investors can use for the purpose of controlling their sales and purchases on the market. It works the following way: when the price of the underlying security reaches a specified level set by the investor, the hard stop gives an uncompromising order to sell the security.

Actually, the hard stop is more of a concept or strategy than an order itself. As its name implies, the hard stop is quite a determined and inflexible strategy. These characteristics can be profitable in one situation, and unprofitable – in another. Usually, traders use the hard stop very carefully, and some avoid it completely. Technical analysis is a great assistance for investors in these matters.

Purpose of the Hard Stop

The hard stop is aimed to prevent investors from possible losses. It’s set in advance of probable price changes on the market and remains active until a specified price level is reached. Let’s contemplate the following examples:

1. An investor purchases 50 shares of a company for $15 per share and decides to set the hard stop for all of them on the price level of their purchase price, or cost basis. This strategy guarantees protection from possible losses, but at the same time doesn’t promise any profits.
2. The initial data are the same as in the previous example, but the strategy is relatively different this time. Suppose that the investor sets the stop order with the price level of $30 per share for 25 shares out of 50. If the price reaches this level, the investor will fully repay his purchase. Moreover, he will have the other half of shares left in the hands in case of continuous growth of the price.

Risks of the Hard Stop

As was mentioned before, the hard stop is a rigid strategy of saving your investments, therefore you should consider the associated risks of using it. The market environment is highly unstable and changeable, that’s why it’s not always reasonable to stick with some highly inflexible strategies as the hard stop. It might cost investors, if not losses, then at least lost profits. For example, an investor sets the hard stop for 50 shares at the price level of $15 per share. The price of the shares on the market starts to rise and reaches the price target. The hard stop gets activated, and the deal is done for $15 per share ($750 in total). But the prices continue to grow and soon get to the level of $18.5 per share. The investor has lost a chance of gaining $925 for these shares. The situation could have been even more unprofitable in case of a whipsaw or other unpredictable fluctuations of the prices.

Hard Stop alternatives

The hard stop is decisive and irreversible. If this option isn’t suitable for you, consider other alternatives:

• A soft stop, or mental stop, doesn’t require setting the price level in advance, therefore the order doesn’t happen automatically. The final decision is up to an investor.
• A stop loss order is a type of order that is set for a specified range of prices, thereby having more flexibility than the hard stop.