Stop placement, gaps and slippage
A stop is a plan, not a guarantee. Place it where the idea is wrong, then budget for fills that are worse than planned.
Where stops belong
Place stops beyond the level whose break invalidates the idea, plus a buffer related to normal noise (for example a fraction of the average daily range). A stop inside normal noise gets hit by randomness; a stop chosen only to fit a dollar amount has no logic.
Round numbers and obvious swing points attract many stops. Some traders offset slightly beyond them.
Why fills differ
A stop-market order becomes a market order when triggered; it fills at the next available price. Overnight gaps, news and thin books produce slippage. A stop-limit avoids bad fills but may not fill at all, leaving you in a losing trade.
Worked example
A gap through the stop (synthetic)
- Long 200 shares at $50.00, stop $49.50. Planned risk = 200 × $0.50 = $100 (1R).
- Bad news overnight; the stock opens at $47.80 and the stop fills there.
- Actual loss = 200 × $2.20 = $440 = 4.4R.
- Mitigations: smaller size around known events (earnings), avoid holding through them, or accept and budget for the risk.
Plan for 1R, prepare for occasional multi-R losses.
Common misconceptions
“A tight stop means low risk.”
It means small risk per share; it is hit more often and gaps can exceed it.
“Moving a stop further away 'gives the trade room'.”
It silently increases risk after entry. Widen the stop only by cutting size to keep risk constant.
Checkpoint