What is a Hard Stop
A hard stop is a price level that, if reached, will trigger an order to sell an underlying security. Hard stops are set at a constant price and are inherently good until canceled, which differentiates them form trailing stops or other similar order types. Often times, hard stops are used to protect a long-term investment after the money has been taken off the table.
BREAKING DOWN Hard Stop
A hard stop is placed in advance of an adverse move and remains active until the price of the underlying security moves beyond the stop level. Many traders will choose to set a hard stop once the price of their investment becomes profitable and will leave the order active until it reaches the price target. For example, a technical trader may buy a stock following a breakout from an ascending triangle and place a hard stop just below the upper trendline support with plans to either take profit when the price target is reached or exit the position if the breakout fails.
Hard stops are often used in conjunction with technical analysis to maximize the odds of success. By placing these orders just below support levels, traders can avoid being stopped out prematurely if the market experiences a whipsaw.
Trailing stop loss orders are a common alternative to hard stop orders, where the stop loss price point is reset on a regular basis to account for an increase in the underlying stock price. The idea is to constantly maintain a buffer without letting the stock drop too far before taking profits.
Example of a Hard Stop
Suppose that an investor purchases 100 shares of Acme Co. for $10.00 per share.
The investor may decide to place a hard stop at $10.00 per share, once the stock has moved meaningfully higher, to ensure that they don't experience a loss. Since it's meaningfully higher than the current price, there's no risk of the hard stop order being executed by a brief whipsaw. The goal is to ensure that the position is never underwater following the hard stop order's placement.
Alternatively, the investor may wait until the stock reaches $20.00 per share since they will have earned $1,000 in profit. They may set a hard stop at $20.00 per share for 50 shares, which would effectively remove their cost basis from the position. The remaining 50 shares would be treated as house money in the sense that there is no net loss on the total 100 share position if they were to go to zero. This is known as taking money off the table.