The 5 p.m. stop-out

[Fairman]

The 5 p.m. stop-out

A familiar sight: price spikes at 17:00 New York time, hits stop losses that had been sitting comfortably, and returns within minutes. The daily chart on the bid shows nothing special.

What happened is a spread event. At rollover, the spread widens dramatically. Short positions have their stops on the ask side. When the ask jumps up through the stop level, the stop triggers. The bid chart may show no move.

Long positions are exposed too, in a different way. If the quoted bid drops because quotes are pulled, the stop on the bid side triggers.

The result is a cluster of stop-outs at precisely the same time every day, for traders who hold positions through the window. The stops are not being hunted in a targeted sense. They are being triggered by a mechanical widening.

Brokers differ in how they handle it. Some suspend stop triggering for a few minutes. Others do not, and let the wide quotes trigger orders.

Anyone with positions open at rollover should check the broker's policy and keep the stops out of the likely range of the widened spread.

How many stops in the account's history were triggered within ten minutes of rollover, and what did the chart show?