Gap Risk Explained

Summary

Gap risk is the risk that price jumps from one level to another without trading through the levels in between. It matters because losses can exceed the planned amount even when a stop has been set.

Definition

Gap risk is the possibility that the market moves abruptly from one price level to another without trading at the intermediate prices. The article defines it as a risk that can cause exits to occur worse than planned, and its worked examples note that if price gaps below a stop level, realised loss may exceed the intended amount. This matters because a stop order is an instruction, not a guaranteed execution price. In a trading plan, recognising gap risk helps you size more conservatively, think carefully about overnight exposure, and avoid assuming that planned risk and realised risk will always be identical.

Sources

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