What a Weekend Gap Does to a Stop

[Fairman]

What a Weekend Gap Does to a Stop

You hold a long of 0.50 lots on EUR/USD with an entry of 1.1020 and a stop at 1.0975, risking 45 pips, which is 225 dollars. Friday's close is 1.1000. Over the weekend, a political shock sends the Sunday open to 1.0940.

Compute the plan versus reality. Planned risk was 45 pips from entry, but the position had moved 20 pips against you by Friday's close, so the stop was 25 pips away from the Friday price. At the gap open of 1.0940, the stop at 1.0975 is already beyond. It fills at the first available price, near 1.0940.

The actual loss from entry: 1.1020 minus 1.0940 is 80 pips, at 5 dollars per pip is 400 dollars. Against the planned 225, the loss is 78 percent larger.

On a 10,000-dollar account, 225 dollars was 2.25 percent. The actual 400 dollars is 4 percent. If this was an account with a daily loss limit of 3 percent, the limit is breached before you can act.

What could you have done? Reduce the position on Friday, close it, or size for gap risk: if you accept holding over weekends, assume the stop may be exceeded by two or three times the distance, and size accordingly.

A 0.20-lot position would have lost 160 dollars on the same gap, 1.6 percent.

Gaps this size are uncommon in major pairs, but they happen, and one is enough to damage an account.

Your turn: compute your loss if your largest position gapped 60 pips through its stop.