Gapping

I know this has been talked about a million times, but it the one thing that scares me. I understand that if the makrets move against you very quickly, a non-guaranteed stop loss might not work. However, I dont understand by how much it will miss eg on the FTSE if you put a normal stop at 5000, if the market moved really quickly and flew past this, how many points would you geneally get caught out for? I guess what I am really trying to wokrk out is whether it is better to pay the higher spreads for a guaranteed stop or just take the rough with the smooth on normal stops... Also, I wont be monitoring it all the time as I cant always check it at work, so this is a particulary important issue as the market could really move and I would not know about it.

They'll fill you at the first opportunity they can in the market. Depends why it's gapped. If you're holding over a rate decision and they suddenly raise and no-one's expecting it you could see it gap 100 points. But you're better off doing non-guaranteed. You pay a lot extra for guaranteed and you won't need it most of the time as you will get stopped at your price. Only reason to do guaranteed is if you hold stocks overnight and are concerned.

Yeah, guaranteed stops are a form of insurance, so in the long run over many trades I'd expect it to cost you more than being uninsured.

Thanks for the replies. I will only be betting on the FTSE and Gold, so I take it a large gap (say over 15) is not that likley on these markets?

So long as you don't trade around key major economic announcements ie. Rates, GDP and anything else that is likely to cause a rapid move your stops will be obeyed.

Hi robbyd - I am swing trading so my stop on the FTSE100 would typically be 50-100pts from entry (a day's range): I would taper down the position size for the stop situations at the top end of that range. However, even given such a margin, I generally remove my spreadbetting stops overnight: I have been stopped out by fluctuations that are irrelevant to the underlying markets and their TA so many times.

Also, bear in mind that if you're SB-ing the future months, bid-offer for this could be way off the underlying market's true value - so you have to base your TA on the underlying but set your stops based on the quote for the book you are trading.

roy I really wouldn't worry about gapping if you're trading intraday.

Worry about it if you're going to hold positions when the market isn't open. In such a case there is very little limit to how far they could gap.

If you hold short positions overnight (particularly in stocks) you put yourself at unlimited risk; However this is trading and this is what we do... In all trading there is going to be large risks, except
- When buying stocks (going long) without margin, you know your exact maximum risk upon entry (The amount you buy)
- When BUYING puts or call options you also know your maximum risk.

Anything else has added danger.

I'm sure i've really motivated you to this whole trading idea.

Thanks again for the tips - really appreciated. I guess the main lesson is dont hold overnight unless you are willing to take a hit sometime!

There is a fear of gapping prices shooting past a stop before it can be triggered. I suspect its due to swing trading style that uses what many shorter-term traders would call distant stops but I find this is a rare event. Much more common to see evening action between the London close and NY close, or pre-and immediately post-London open volatility hit stops, only for price to resume exactly in the tendency before that point.

Also beware of overnight GTC (good till cancelled) orders. I have also lost repeatedly where I have placed an entry order, some time during the London morning session, find it triggered at 5am next morning, then the market reversed when it opened at 8am. As much as I don't like to leave stops in place overnight, I don't leave orders in place either.