How do you handle gapping through a stop loss?

[Indoril]

I have traded for a couple of years now and this is the first time this has happened to me, although I had heard of it happening to others and was well aware of the possibility.

Yesterday an annual report was released and the profits of a particular company were not as great as expected and the market reacted by gapping down and through my stop limit order. I left it for the rest of the day while I was at work and when I got home I adjusted my order again to fill just below the last price of the day expecting it to get filled in the morning. Lo and behold, it gapped through my order again this morning so I logged on and sold on a market order.
This makes me really uncomfortable doing this because it is so far away from my trading plan. What did I do wrong and how can I avoid it in future? I'd love to hear how others handle events like these.

 

[Wysiwyg]

Was the stock in a down trend before the news? 'Usually' company performance is baked into the share price direction. You sometimes see a bullish move leading up to the announcement.

 

[cynic]

Faulty presumptions, around which trading plans are so often built, can often be the undoing of aspiring traders.

Surprise market events are these troublesome things that happen when people are busy making other trading plans.

Imagine an umbrella that typically works on sunny days, and often fails in stormy weather!
(Can you see how this analogy might relate to your recent experience?)

Ideally, any long term trading plan, needs to incorporate safeguards against all likely market behaviours.

Price gaps are very much a feature of many markets and, as such, should ideally be given due consideration, when incorporating risk management practices into one's trading plan.

 

[skc]

This makes me really uncomfortable doing this because it is so far away from my trading plan. What did I do wrong and how can I avoid it in future? I'd love to hear how others handle events like these.

You can't eliminate it... it's part of trading. You can reduce the chance of it happening, or reduce of consequence of it happening. Some possible actions:

1. Avoid holding into known events (like AGM, reporting etc).
2. Reduce overall position size.
3. Know the stock well - some stocks are gappier than others.
4. Have a plan - do you exit on open, read and assess the news, get out at end of day etc etc?
5. Consider other protection or hedges (e.g. guaranteed stops on CFDs).

There probably are others...

 

[tech/a]

Which stock was it?

Gaps are extremes. Everyone rushing on OR off.
As stated from those who have answered some cant be foreseen.
Some can ---that's why I ask.
What happens after the gap should also be considered.
If there a wide range very high volume bar In the direction of the gap.
Or is there a squat bar on really high volume or a reversal into the gap
on the day of the gap. One is hold and see the other is get out!

Prevention--don't trade!
Youll get positive and negative gaps.
Celebrate the positives and curse the negatives!
It all comes round!

 

[traderxxx]

indoril
if you had placed a stop loss instead of a limit loss you would have been
filled on the first gap down instead of missing the second gap down then getting out
at market.
a std stop would have got you out at market the first day.

 

[Indoril]

The stock is CNU (Chorus Limited). Frankly I should have sold it a week ago because it hasn't been performing anyway.
Having another look at the chart just now, I'm glad I took the market order this morning so I guess things could always be worse!
Luckily this was a small position because I didn't have my usual faith in the stock to begin with.

I have thought about using a regular stop (market) instead of a limit but I, until now, have not felt comfortable using market orders. What's the general consensus with stops? Market or limit? Do you make the consideration based on the liquidity and how "gappy" it is?

 

[tech/a]

Had a look.
Nasty.
When holding it is a risk when stock goes side ways.
Not a lot you can do to anticipate in this particular case.

 

[Wysiwyg]

Yes agree that was harder to anticipate. SKC's avoid list - no.1. best advice.

I have been smoked bad twice on that top out, pull back scenario. Buying in anticipation of continued upward price movement.

 

[pixel]

What's the general consensus with stops? Market or limit? Do you make the consideration based on the liquidity and how "gappy" it is?

fwiw, I never place stop orders. For starters, when a share is in pre-open, i.e. before a match-out Auction, you can't place "at Market" orders. That aside, I will only rarely leave orders on the Board, neither conditional (stop) nor enduring ones. There are three main reasons for it:

1. Suspicion that "someone" might see current stop orders and feel tempted (if feasible) to arrange a little stop raid. In the past, that has definitely happened, especially when orders still had to be phoned or emailed through to a Broker, where some desk jockeys would key them into SEATS. As I am now DMA-trading through a Broker whom I know and trust, that is no longer an issue.
2. There is no hard and fast rule, how a particular stock will react to a particular result. Much can be read - or "guessed" - from observing how orders are placed, stacked, pulled, moved. Even more can be gauged from knowing what kind of (retail) punters are in the game and how it has been traded in recent days. Ramped at hc? Toyed with by day traders?
3. Some stocks have a history of depth screens thinning out, specifically on the buy side, followed by some well-placed sell orders that push "Market" briefly down into danger territory. As soon as that triggers a larger avalanche of pre-placed stop loss orders, I prime a few buy orders that I can activate/execute quickly if the stop raid takes off and back up.

All of the above is of course contingent upon my being at the desk at all times, but in my case, that's a given. My watchlist places a mark next to a share code as soon as a new announcement arrives. I then have 10 minutes to digest and take action.

In CNU's case, it is most likely that I would have placed a $4 sell order into Monday's Opening Auction, just to make sure it gets taken. Had I missed it, and/or for some reason still held stock this morning, my sell order today would have gone down to $3.

 

[grah33]

understand gaps. some crazy gaps can happen, with effects multiplied for short term trading, and/or using leverage. some bad examples in the past include shorting with shares, chf jan 15th currency flash crash (4000 pips)...

 

[Indoril]

Thanks for everyone's input. I've taken it all in.

 

[Triple B]

Gday .
Newb here .Love the site.

Could you take a CFD short position the day before the announcement.
good announcement , gap up cover short position and hope for a big rally for the day .gap down close long pos , and cash in short!!
you wont make money with both positions open but you wont lose either [except brokerage]
Please let me know if this is not a good idea and why
Sounds like a quick trip to the toilet at work ,to put a market to limit order was probably the go.
Please go easy on the newb paper trader.
I did see a list of reporting season dates. I will see if I can post a link.
Here it is , there are others about.
https://www.home.saxo/en-au/-/media/documents/regional/au/others/au-earning-schedule-h2-17.pdf
I would think that knowing these dates would be an important part of managing risk.
I was actually thinking there might be a way of trading these announcements from august -Sept.

 

[CanOz]

You could hedge it with a cfd, but that may be only because you want to hang on for divies or avoiding cap gains...

 

[Indoril]

You could hedge it with a cfd, but that may be only because you want to hang on for divies or avoiding cap gains...

Yes. It also means I need to keep cash in a CFD account that I wouldn't normally use.

 

[CanOz]

Well it may not be a bad idea to keep some funds in a cfd account for hedging if you tend to need to do that often...again it all comes down to having a plan. Some people think detailed plans are over the top but in order to be consistent...they're a necessary evil.