Several readers have commented recently that they too prefer the use of a soft sell stop vs. a hard one.
What’s the difference?
Hard sell stops attempt to get you out of a position at an exact predetermined figure. For example, if you bought an ETF at $10, your trailing sell stop of 7% would be at $9.30. If the markets get close to that number, you would place an intraday order with the idea that you want to get stopped out as close to that price as possible.
I have found that these types of hard sell stops can bring about a host of other problems, which I elaborated on in Front Runners.
Let’s use the same example from above for the use of a soft sell stop. In that case, I will not place my sell stop order intraday but wait for the closing price before making my decision.
If the closing price has clearly pierced the 7% level to the downside, I will then place my sell order the next day after verifying that there is not a huge rebound rally in progress. If there is, I will delay my decision for another day and thereby may have prevented a whipsaw signal.
That extra step eliminates participating in intraday “market noise” and avoids being subjected to front running activities.