Hard vs. Manual Stops—Which Is Better?

01/30/2014 6:00 am EST


Michael Bellafiore

Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

Veteran trader Mike Bellafiore of SMB Capital shares a question-and-answer between him and a newbie trader, which others could also find helpful.

Question: I find some ambiguity with the hard or manual stop. I always use a hard stop, partly because as you say a fast market can result in a much larger loss than planned. What is the advantage of using a manual stop only?

Answer: Solid execution is a skill that can take years to develop as a pro trader and can make a huge difference for your trading results. Where, how, and when to place your stops are decisions you get better at as you gain trading experience. Sometimes the difference between a manual stop versus a hard stop can be the difference between getting stopped out of your best position of the day and making a huge chop. Let’s explore the difference between a hard and manual stop.

The advantages of a hard stop:

1) During fast markets, you may get better covers as your exit is triggered automatically above/below price.

2) Psychologically, you may reduce your stress as the hard stop is responsible for your downside with the trade.

3) You can cover more positions when you use hard stops.

4) After placing a hard stop, you’re less likely to talk yourself out of the position as you let the computer handle the stop.

5) Psychologically, it may be easier to handle your loss as there is not an extra step, manually exiting, before you recognize the trade loss.

Disadvantages of a hard stop:

a) You are susceptible to wick stop outs.

b) Slippage and then your automatic stop may cause an exit far worse than if you manually exited.

c) Predatory algorithms search for weak hand exits and will more trigger stops that manually you would have ignored.

d) You are losing practice exiting at the best price possible manually, which will weaken your tick trading skills.

I mostly use hard stops with my trading. There are times when I recognize wick stop out risk and use price alerts and then a manual exit. When I am scalping I use manual stops.

Developing traders need to consider the best form for their stops for each trade. This is an important part of execution. Entrepreneurs learn that ideas without execution are useless. Trading without good execution can lead to a bundle of frustration and certainly underperformance.

By Mike Bellafiore, Co-Founder, SMB Capital

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