1. An initial stop (which can then turn into a trail stop after a move in your desired direction) this is placed below the current price (if going “long” and visa versa if going short – this is implicit through the rest of this article)
– What you are saying is : “If the stock should drop to this level then I am going to retain the capital left in this position. Depending on whether an initial or a trail stop this can still of course be a profit or a tolerable loss”
2. A profit target placed above the current share price – What you are saying is: “If the price hits a particular point I am removing the trade from the market and retaining the profit at this particular level. This is invariably a profit.
Quite often both “stops” are in play at the same time.
As a suggestion here is another alternative for something that (usually) has gone in your desired direction.
Let’s term this a “high stop”.
What you are saying with this type of stop is: “If a price goes over a particular point then I would like to stay in the trade otherwise I am happy to take it off the table and take the profit that is already there”.
This is where a stop price is placed higher than the previous close price and most often this approach is time-limited e.g. after the first hour if the price is below $X then close. Otherwise, if the price exceeds this, you are still in giving you the potential for continued upside.
This approach could be particularly useful logically:
a. If there is a resistance line present above current price whereby the high stop is set at the resistance level. Hence a breakthrough is technically indicative of further potential upside
b. There is a sensitive data point or event imminent that may have an impact on the market as a whole and of course consequently any position open. In this case a high stop would allow the position to remain in good news and be taken off otherwise
c. There is general market uncertainty either now or very recently and you are perhaps looking to reduce the number of positions you have open or take some risk off the table as the reason for the uncertainty still has the potential to upset markets again. Of course should there be a move in the first hour that is above your high stop should it subsequently drop back down again then essentially the exit will be triggered immediately.
Hence, in theory it has the advantages of a profit target whilst still allowing further upside.
Something to consider?