What Is Soft Stop Order?

A soft stop order is a mental reminder set by a trader to consider placing an order once a particular💦 ♉price is reached.

Understanding a Soft Stop Order

A 澳洲幸运5开奖号码历史查询:stop order is an order to buy or sell a security once its price has crossed a particular threshold. A stop order is "soft" if it has not yet been submitted to a broker but instead is merely an intention in the trader's mind. In that circumstance, t🦄he intention can be modified or ignored depending on market conditions and the judgment of the trader. By contrast, a regular (or "hard") stop order is one that has already been placed with a broker.

A trader might want to cut their losses, for example, and sell a stock if 🦹its price declines by more than 20%. However, instead of issuing an order to that effect, they may feel more comfortable using a soft stop order so that they can reconsider their decision in light of the market conditions and other new information available at that time.

Traders will often use a soft stop order when they have a price in mind at which to buy or sell a security but they do not want to commit to that price by issuing a formal stop order. This might be because the trader wants to reserve some subjectivity to see how overall 澳洲幸运5开奖号码历史查询:market sentiment appears to be once the price reach꧋es that pre-defined level.

Soft stop orders can be helpful or harmful depending on the psychology of the investor. On the one hand, they can protect investors against committing to poorly thought out decisions. After all, traders who opt for a soft stop order can take time to conduct further research before committing to their trade. On the other hand, soft stop orders could also undermine traders' discipline, allowing them to postpone or ignore difficult decisions that would nonetheless be in their long-term interest.

Soft Stop Order Example

Suppose you are a value investor. As part of your investment methodology, you maintain a 澳洲幸运5开奖号码历史查询:watchlist of companies tꦚhat you would like to buy, provided their prices decline to more attractive levels.

One of the companies on your list is XYZ Corporation, a company you have long wanted to buy but which has always been too expensive for your liking. Its currentꦇ share price is $50 per share, and you have long maintained that you would buy it at $45 or better. Once you have bought this, you have a soft stop order whereby you wo♚uld get out of it if it fell to $30, but you will not place a hard order at this level.

One morning, XYZ issues a press release announcing a recall for one of their largest products. The market reacts with panicked selling, sending the price plummeting to $40 per share. At first, you cannot believe your luck. For years you have waited for an opportunity to buy XYZ shares, and now that opportunity has finally come. But since you never formally en꧑tered your order to buy at $45 per share, you can pick up the desired amount of shares at $40. Now, that soft stop order at $30 that you had decided on is in play.

As more information pours in about the product recall, the price continues its downward trajectory to where it approaches $30. At this point you have a decision to make. Should you trust your prior risk management strategy and get out of this position for a loss of $10 per share or should you amend your soft stop order lower, to maybe $25, and see if the selling pressure abates. After all, you had long thought of XYZ as a well managed company that would add value to yo𓄧ur portfolio.

Ultimately, you decide to trust your previous research and lower your soft stop order. However, this episode reminds you of how 澳洲幸运5开奖号码历史查询:investor psychology can play an important role when using soft stop orders to make in♊vestment🍨s.