Stop loss, gaps and slippage: when the loss is bigger than planned

A stop loss is your insurance: the point where you admit the idea was wrong. But it isn't an absolute guarantee. Understanding how it really works spares you nasty surprises, and tells you how much room to leave in your calculations.

Where to put the stop

A stop makes sense if it sits where, if price gets there, your idea is invalidated. Not where it's convenient for keeping the lot size big, and not at some arbitrary distance ("20 pips for everything").

• Beyond a structure: for a buy, below the low that started the move; for a sell, above the high.
• With a margin for noise: price often pokes at a level before respecting it. Put your stop a little beyond it, not exactly on the level.
• In proportion to volatility: on a very choppy chart a 10-pip stop will get hit by noise alone. The ATR (average true range) gives you a feel for typical movement; stops smaller than one ATR are almost always too tight.

If the stop, placed where it belongs, forces a lot size too small to be interesting, the trade isn't worth taking. That's not a reason to tighten the stop.

Never move the stop further away

Widening the stop as price approaches it ("I'll give it more room") is the error that turns a small loss into a big one. You can move a stop only in your favour: to lock in profit or to take it to breakeven once the trade has done its work. Never in the direction that increases the risk. If you want more room, you should have given it at the start and used a smaller lot size.

A mental stop isn't a stop

A stop "in your head" doesn't exist when you need it: at the critical moment you'll find a thousand reasons to wait a little longer. A stop is an order sent to the broker along with the entry. The only exception is when a written plan prescribes different handling and you follow it to the letter.

Slippage: when you're filled at a worse price

A stop loss is normally an order that becomes a market order once price is touched. If at that moment the market is moving fast or liquidity is thin, you get filled at a price worse than your stop. The difference is slippage.

Slippage is normal, especially around news and market opens. You can't eliminate it, but you can allow for it: leave a safety margin in your calculations (risk a little under your limit) and avoid holding tight-stop positions in the minutes around high-impact news.

Gaps: when price jumps

A gap is a jump in price between one close and the next open: typically over the weekend, but also after unexpected news. If the market reopens well beyond your stop, the order is filled at the first available quote, not at the level you wanted.

To reduce gap risk: close or cut positions before the weekend if you don't want to run it, don't hold oversized positions into unpredictable events, and remember that some brokers offer guaranteed stops, usually for a fee or with restrictions: check whether yours does, and on what terms.

Real risk is a range

Treat your risk as a precise number when you plan, but know that the real loss will fall in a range: usually a little above the planned figure (spread and slippage), rarely far above (gaps). That's why risking 1% per trade is prudent and 10% is out of control: a single event can cost you two or three times what you planned.

In short

• A stop goes where the idea is invalidated, with room for noise, not where it suits your lot size.
• Never move a stop further away; only in your favour.
• A stop is an order sent to the broker, not a promise to yourself.
• Slippage and gaps can cost more than planned: leave a safety margin and don't hold positions that are too big when risk is high.

Practice

1. Pick three charts and, for a hypothetical trade on each, say where you'd put the stop and why (which condition invalidates the idea).
2. Work out what happens to your risk with 2 and 5 pips of slippage on a 20-pip stop.
3. Look back through your journal: how many times did you move a stop? In which direction?