Lessons › Risk and money management › Gaps and slippage: when stops are not guaranteed
World 5 · Risk and money management · lesson 12 · level 4
Gaps and slippage: when stops are not guaranteed
A stop is an order to get out, not a promise of the price you will get.
In one line
A stop is an order to get out, not a promise of the price you will get.
Explained simply
Imagine you plan to get off a bus at a certain stop, but the driver skips it and the next stop is far down the road. You still get off, just further away than you planned. A stop order works the same way when prices jump past it.
The lesson
A standard stop order becomes a market order when it is triggered, so it fills at the next available price. If price gaps past the stop overnight or jumps in a fast move, the fill can be far worse than planned, and that difference is called slippage. Traders allow for it by trading smaller around results announcements, central bank decisions and weekends, and by avoiding thin markets. A stop-limit order sets a worst price, but it may not fill at all if price jumps past that limit.
A worked example
Illustrative example: a trader buys 100 shares at 500 with a stop at 490, planning to lose 1,000 (100 times 10). Bad results come out overnight and the stock opens at 460. The stop turns into a market order and fills near 460, so the loss is 4,000 (100 times 40), which is 4 times the plan (4,000 divided by 1,000). The extra 3,000 (4,000 minus 1,000) is slippage.
The same idea at four levels
- Beginner. A stop is an order to get out, not a promise of the price you will get.
- Foundation. A standard stop becomes a market order when triggered, so it fills at the next available price.
- Intermediate. If price gaps past your stop, the order fills near the open, and the extra loss is called slippage.
- Advanced. Size for the gap, not just the stop: if a results gap could cost 40 a share, a 1,000 loss limit allows 25 shares.
- Expert. A stop-limit order caps the fill price but may not fill at all, so experts weigh a bad fill against no fill and cut size before known events.
Mistakes to avoid
- Assuming the stop price is the worst loss you can take.
- Holding full size through results or weekends without planning for a gap.
- Expecting an exact fill from a tight stop in a thinly traded market.
Check yourself
What does a standard stop order become when it is triggered?
A market order. It fills at the next available price.
What is slippage?
The gap between the price you planned and the price you got. It is the extra cost of a worse fill.
Is the stop price the worst loss you can take?
No, a gap can fill it at a worse price. Stops fill at the next price available.
When is slippage most likely?
Around results, central bank decisions and weekends. Big news can move prices past your stop before you can act.
You bought at 500 with a stop at 490, and the stock opens at 460. Where does the stop likely fill?
Near 460. Once triggered, the stop takes the next available price.
Goal of this lesson: Understand why a stop can fill at a worse price and how to allow for it.