When markets hear major news, and certainly news that was unexpected, it can promote a rapid rethink of its pricing and positioning. Central bank meetings, political events, economic problems – all these events get strong reaction in response.
Aside from known event risks, such an FOMC meeting or a US Nonfarm payrolls report, holding positions into a weekend is one of the classic times when the risk of gapping is higher.
If key news breaks when the markets are closed, the price upon the market reopening may be meaningfully different from the Friday close. It is the time when traders will often experience greater probability of slippage.
The term ‘slippage’ refers to the execution and resulting fill of a stop-loss order relative to that of the specified stop-loss level you might have attached to your open position.
Traders can also get slippage on market stop orders to open a position, with pricing moving through the specified level to open a trade and the trader getting a worse fill than what was desired on the deal ticket.
Slippage can happen at any time when markets are open. Market ‘flash crash’ is a rare occasion, but it can happen. Traders need to manage this risk by monitoring their accounts and positions.
Three ways you can manage your risk:
- Correct placement of stops relative to the instrument’s volatility and period range
- Stay in the know around potential high risk news events
- Know when to hold and when to fold before an event risk.