Let’s say I’m shorting a stock.
It’s currently at $2. I set a stop loss at $2.50.
After hours trading brings the stock up to $5.
How does my stop loss work in this case when the market opens? It will open $2.50 past my stop loss.
Will my account blow up?
a stop loss is just a triggered market order. the result is that you will trigger at market open for whatever the going price is and it will lock in your losses immediately.
use a stop limit instead and if your order cant guarantee a price is met, then it does nothing, there risks here being that the price could move further. in which case its possible for you to get margin called and locked out anyways if you lack the funds to keep holding until the price returns back down to below $3
This is a great post explaining things if you need more info