Exploring market gaps and what it means for stop loss, take profit and orders

So what is a Market Gap?

When a market is closed (for example, during weekends or daily market breaks), there are no rates being traded however, news and announcements still affect the markets. It is possible that the market will open at a rate which is significantly different from the previous closing rate due to the changes in demand. In today’s highly volatile market conditions, market gaps could occur during normal trading hours as well and we encourage all users to take this into consideration before opening positions or orders.

Market Volatility Explained

Volatility is a general term, used to describe many different types of movements in price, or more precisely, a range in which the price of an asset moves. In general, it refers to how much a certain asset’s price shifts over a period of time, serving as an indicator of its stability and risk. Usually, the higher an asset’s volatility, the riskier it is considered. However, risk is also impacted by other factors. Volatility may be generated by factors such as unexpected weather conditions, interest rate decisions, geopolitical factors, earnings reports, and numerous other reasons.

When can we expect to have big gaps?

When we have events that affect the market – financial/political announcements, natural disasters and more.

How can you predict market gaps?

It cannot always be predicted – however with some events planned ahead (elections for example), it is possible to predict a market swing.

What does this mean for my Stop Loss, Take Profits and Orders?

We’ll start with what a Stop Loss is – It is a risk management tool which aims to add protection to your investment and an instruction to close a trade at a specific rate, if the price is going against you, to prevent additional losses. A Stop Loss is mandatory on every position with the exception of non-leveraged BUY positions. If the market reaches your requested rate and you have lost the predetermined amount, the Stop Loss will trigger and automatically close your position.

When the market is volatile/when a market gap occurs, the Stop Loss rate you requested may not be traded in the market. In this case, the Stop Loss will trigger at the next available rate. The result is that you could lose more than you were prepared to on the trade.

Please be aware this is not ONLY an eToro limitation, but how the markets work. The same is relevant for Take Profit and Orders.

Does this happen only during the weekend?

No. Market gaps can and do occur during any trading day in high volatility when there are events that move the markets significantly.

Will I always lose from this?

Not always- just as your Stop Loss might get “skipped”, this can also happen to your Take Profit leading you to profit more than you may have set for yourself.

As always and especially in today’s highly volatile market conditions, we urge you to stick to the basics of investing: diversify, avoid leverage, and only invest in markets and instruments with which you are familiar.

adrinvestors.com

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