How it works
Stocks gap most often overnight or over weekends when news breaks between sessions. Currency pairs gap on weekend opens (Sunday evening GMT) after weekend news. Futures contracts gap on roll dates and in response to overnight macro events. The gap can be in any direction, of any size; there are no maximum-gap limits. Once a position is held through a gap, stop-loss orders that were inside the gap range fill at the gap-side price, not at the stop level.
Example
A trader is long an S&P 500 future at 5,200 with a stop at 5,180. The future closes at 5,210 Thursday. Overnight, an unexpected geopolitical event triggers a sell-off; Friday opens at 5,100. The trader’s stop converts to a market order on the open and fills at about 5,099. Realised loss: 5,200 − 5,099 = 101 points, not the planned 20 points. The same dynamic devastates short positions during favourable gaps in the opposite direction (think Pfizer post-vaccine announcement in November 2020).
Why it matters
Stop-loss orders do not protect you from gap risk; they protect only from continuous price movement. Real protection requires position sizing that survives the worst plausible gap (3 to 5 percent for stocks, 5 to 10 percent for highly news-driven names like biotech). Alternative protections include hedging with options (cost: premium decay) or closing positions before known catalyst events (cost: missing potential upside). For carry trades over weekends, accept gap risk explicitly or hedge it.
