Stop Losses Triggering

Hello you very wonderful and intelligent individuals that make up these forums. I sincerely hope everything is going well for you.

I was kindly wondering please, i have been trading a few small cap stocks which can be very volatile, but can be profitable. If for instance i set a stop loss on a stock at $2, so for instance it falls from $3 to $1, but this is slowly over a week, is there more chance of my stop loss being triggered at $2 please? Lastly if there is a rapid drop over say a few hours in a day from $3 to $1 could it be more likely my stop loss is triggered under $2 please? If anyone kindly had any thoughts on this i would be forever grateful and thankful it would mean the world to me.

Sending you lots of good wishes and i truly hope you continue to have a wonderful life and achieve massive success with your investing. All the very best to you.

OK the answer to this could fill pages.

Personally I never use stop loses because they are so easily manipulated by the market and those with very deep pockets. Personally I set alerts that I can quickly respond to and look what’s happening but I take the view that if I invest in companies I am happy with long term a drop in price is more likely to be a buying opportunity than a reason to sell possibly at a loss. I’ve seen very large market cap companies share price drop by a big amount to then quickly recover ground.

So to answer your actual questions:

A stop loss does not (in general) guarantee the price and often the price can be lower then what you set. The price isn’t an execution price it is a TRIGGER price. So the order is triggered when the price drops to the price you set but that means that the order is then submitted to the market so the actual price could easily be lower even in a reasonably stable market. If the price is crashing the price could be way below what the order trigger price was. Also filling the order depends on liquidity, order size, etc. (and whether trading halts).

If the price is gradually going from $3 to $2 and you set a $2 stop loss then it is likely that it will trigger at $2 and be executed just below that (or at $2). If you are unlucky it will close at $2.01 one say and then gap down to $1.80 the next day meaning you will get $1.80.

If the price drops dramatically then the execution price could be a long way below the trigger price for the order. Also most big drops then have a fairly significant bounce up so there is a good probability that you will be closed out at the bottom and when you look at what’s just happened the price will be much higher than the price you got.

You also have to be VERY careful now that T212 has pre/post market trading because the price can spike in either direction during pre and after market trading for little/no reason and be back to normal the next day. If your order is set to execute in the after market it may trigger even though the price is normal the next day.

Especially with small/mid cap companies you will often see a move in the opposite direction before a strong move. So if there is good news coming the price will often drop to a new low or have a downward fakeout before then moving strongly upwards. That is the market shaking out stop loses and weak holders to gather shares prior to the rise.

The other thing that I’ve seen many times on charts is you will look at a chart (even for the most boring of companies) and on one candle you will see a massive tail or wick spike. There are several of reasons why/how this can happen but an easy one to understand is the order book being cleared out on one side (possibly by someone with deep pockets who wants shares or wants to get rid of shares). You need to understand level 2 data (I assume investopedia will have a good article) but level 2 (or 3) will have an order book on each side of the market which has ever order placed in the market. So if the price is $100 you might have orders at $100.5, $101, $101.5… and a quantity at each price. Especially for a smaller company or one with low liquidity you can get to the situation where there are very few orders on the order book and thus it is easy to take out all of the orders causing a massive price spike which will then trigger all of the stop loss orders potentially releasing a load of shares at below market price.