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Stop loss is perhaps the best weapon for a trader to control risk. I have already talked about the importance of using stop loss in the past.  Today, this post is about what kind of stops suits you better, a soft one or a hard one.

A soft one is a mental stop. You do not place a real stop loss order after your entry.  However, there is a virtual stop in your mind.   When it is triggered, you exit. One of the biggest advantages of using a soft one is to prevent the crooks from peeking into the order books and playing with our stops.  I firmly believe that some market makers and specialists have the ability to do this. 

There are 2 scenarios. For example, after a stock has consolidated in a range for a while, it might have attracted quite some buyers, who set their stops around the lower bound of that range.  A lot of people like to do that because it is a very good support on paper. Once there are enough stop loss orders accumulated, a crook can take it out for a real quick profit.  Those stop loss orders would crack some small cap, even mid cap stocks wide open for a quick good drop. Unlike a major bear raid, this type of operations needs very little ammo(cost of operation).

Another one is to clean out those wavering bulls/bears so that subsequent pushes will be much easier. You think the stocks are moving up because some retail traders like you and me are buying?  Wrong! A stock moves up because someone wants to move it up.  We will talk about manipulation in the future.

In either case, the stock will quickly rebound to where it was.  Have you ever wonder why there are many head fakes?  A soft stop can help. However, you need to be very experienced in reading the tape so that you are able to tell real breakouts from head fakes.

Some drawbacks of using a soft stop are

1. You need to constantly watch your positions
2. When your internet is down, your positions are exposed to huge risk.

A hard stop is one you send to your broker immediately after your entry. It is suitable for traders at different levels.  It does not have any drawbacks mentioned above. The only one is that crooks might play with your stops.   But again, you could use a wider stop loss or avoid placing your stop around those key points where others love to set theirs.

I would recommend hard stops for most traders.