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Gap Risk and the Myth of the Guaranteed Stop

A stop loss is an instruction, not a guarantee. In normal conditions, it gets you out near your price. When price jumps, it gets you out wherever the market next trades.

Gaps happen around weekend opens, during major news, and at times of thin liquidity. In January 2015, the Swiss National Bank removed its cap on the franc, and EUR/CHF fell about 30 percent in minutes. Stops did not fill at their levels because there were almost no prices in between. Some accounts went negative, and several brokers suffered severe losses, with a few collapsing.

That event is extreme, but smaller versions occur regularly. A stop set at 1.0950 can fill at 1.0925 during news.

Some brokers offer guaranteed stops, which fill at your price regardless, usually for an extra fee or wider spread. They are more common in certain jurisdictions and account types. Check the terms and cost.

For everyone else, position sizing is the real protection. Assume that sometimes your stop will be exceeded by a few times the planned distance, and size so that such an event does not threaten the account.

Avoid concentrating risk before scheduled events and over weekends.

Practical step: ask what your loss would be if your largest position gapped through its stop by three times the distance, and see if you can accept it.

The three-times test is the right question, and it's worth running before scheduled risk as well as weekends. On the night of the Brexit referendum in June 2016, cable fell more than ten percent as the results came in, and liquidity was so thin that stops on some accounts filled far beyond their levels. That was a known date, which is the uncomfortable part: the gap risk sat on the calendar weeks in advance.

Elections, referendums and G7 or OPEC meetings over a weekend are what I check for before Friday's close. If any position would still be open through one of them, I either cut the size or close it, rather than relying on the stop to do something it can't promise.

A real world point: weekend gaps are the most common example. If price closes Friday at 1.0850 with your stop at 1.0820 and opens Sunday at 1.0790, your stop fills near 1.0790, not 1.0820. That extra loss is the gap risk, and it's why I reduce or close positions before weekends. Most weekend gaps on the majors are small, a few pips, but after big political news or an unexpected central bank statement they can be much larger. If you do hold over the weekend, size the position so that a gap two or three times your stop distance would still be a loss you can live with. That's the realistic worst case to plan for.

Some brokers offer guaranteed stops for a fee. They do protect against gaps, but the extra cost adds up, and they're not always available on every instrument. Worth knowing they exist, but for most trades sizing properly is the main protection. The fee works differently by broker. Some charge a premium only if the guaranteed stop is actually triggered, others build it into a wider spread. There's usually a minimum distance from price too, so you can't place one very tight. For holding through a major event or a weekend with political risk, the fee might be worth paying.