The 7 Main Types of Stops in the Market
There are 7 main types of stops or stop loss levels, used by professional traders.
1) Hard Stop
I buy a stock at 100 and my hard stop is at 85.
It simply means, if the stock price touches 85, I am out of the market.
2) Price Stop
The price stop is dependent on market movement, after you take the trade.
There is a difference between a price stop and a hard stop.
You buy a stock at 100.
The next day, the price gaps up and it creates a rising window.
Now, if you understand candlesticks, you also understand that a rising window becomes support.
It means, your updated stop loss level is not the hard stop at 85.
Your updated stop is at the low of the rising window.
You may not move your hard stop up, but mentally, the low of the rising window has become your new stop loss level.
If the price closes below that price, you should be out of the market.
By the way, a rising window has a lower and an upper line. The lower line is a very strong support level.
3) Trailing Stop
If you use the parabolic SAR as your stop, then that's a kind of a trailing stop.
You are moving it in the direction of your trade after each candle close.
This maximizes your reward to risk ratio.
4) Mental Stop
You buy a stock at 100 and then it starts to go up.
When you are in an uptrend, the price usually stays between the Middle Bollinger Band and the Upper Bollinger Band.
Hence, you can keep the Middle Bollinger Band as your mental stop.
You can decide that, you will only exit the stock once it closes below the middle band.
Although your hard stop is at 85, your true exit point has changed mentally.
5) Fixed % Stop
You keep your stop loss at a fixed percentage below the closing of the latest candle.
If you buy a stock at 100 and the next day it moves up, you decide that you want to keep your stop loss 5% below that new closing.
The next day it again moves up.
Again you move your stop loss, so that the distance between the latest candle close and your new hard stop always remains as 5%.
6) Partial Exit Stop
You buy a stock at 100 and within four candles, the price closes above the Upper Bollinger Band.
You could choose to take a partial exit, but at the same time, you could choose to move your hard stop at the original entry price, so that way, you will never lose money on that trade.
7) Reward Stop
You buy a stock at 100, and keep the hard stop at 85.
The moment the trade goes in your favor and is now at a 1:1 reward to risk, you could immediately move your hard stop to the entry price.
You don't want the stock to reverse from that point all the way back to your original hard stop of 85.
Be a smart trader.
Use stops all the time in the market.
No trading strategy is the holy grail in the field of professional trading.
The markets are always supreme.
So, those were the seven main types of stops used by professional traders in the market.
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Thank you.
Regards,
Rohit Musale, CFA
30 January 2023