Gaps and Slippage Trading Guide

Warning
Mind the Gap…


What is a Gap?

‘Gapping’ occurs when prices ‘gap’ or ‘jump’ or ‘slip’ from one level to the next without trading any prices in between.

With spread betting and CFDs this is also called ‘slippage’.

Gaps can cause problems because:
  • warningYou may incur unexpected losses
  • warningNormal Stop Loss orders are not ‘guaranteed’, i.e. a Stop Loss will not protect you from a gap

Why / When Do Markets Gap?

  • warningMarket gapping typically occurs because of major news events or new economic data that creates significant price movements
  • warningGaps are more likely to occur between a market closing and re-opening e.g. weekends when there’s plenty of time for news and/or market data to impact the price
  • warningGaps are more likely to occur in highly volatile markets
  • warningGaps are more likely to occur in illiquid markets
  • warningIf you’re spread betting on individual shares then watch out for gaps around earnings announcements. Company shares can easily gap up and down. A 7-10% gap lower on an earnings miss is surprisingly common (examples below).
  • warningMarkets can gap upwards but are less likely to. Gaps a more common when a market is falling due to all the buyers doing a disappearing trick (or waiting for a better price)


Examples of How Gaps Can Hurt Investors

  • trending_down9 November 2017: Burberry gaps 10% down. The company announced a 24% surge in pre-tax profits to £127m and a 4% increase in like-for-like sales. Not bad. However, pre-tax profits were lower than expected and investors haven’t bought into the CEO’s plans to reduce costs and increase exposure to riskier luxury markets.

  • trending_down8 November 2017: Snap Inc. makes our list again. This time on poor Q3 results. There’s a trend here…Snap gapped $1.75 (11.6%) lower on the open.

Snap Share Price Gap
Chart showing how Snap Inc. gapped lower after poor Q3 results


  • trending_up30 October 2017: Spain 35 (IBEX) gapped 163 points higher over the weekend, i.e. after Catalan separatists declared independence and then Madrid dissolved the Catalan government. I have no idea how it gapped higher on so much political instability.

  • trending_up23 October 2017: Japan 225 (Nikkei 225) gapped 142 points higher to 21,698. This happened after Abe won the Japanese election. It was an election he was expected to win but it was a healthy win too.

    The Japanese stock market gapped more than USD/JPY did on 22 October 2017, i.e. up 0.65% vs 0.3%.

    That’s probably because :

    • arrow_forwardThe strength of Abe’s win was clearer on the Monday morning than the Sunday evening
    • arrow_forwardWith the forex market opening late on Sunday, that allowed the USD/JPY allowed the forex market to let off a little stream

  • trending_up22 October 2017: USD/JPY gapped higher from ¥113.526 to ¥113.853, i.e. ¥0.327 up = up 33 points. This happened when Shinzo Abe had strong exit polls after the Japanese elections.

  • trending_up12 October 2017: Just Eat share price gapped up 7% on the open when the Competition and Markets Authority announced that the FTSE 250 company’s purchase of a key competitor, Hungryhouse, was “Unlikely to result in competition concerns”.

  • warningMore Daily Gaps October 2017

    Continued fallout from Catalonia’s bid for independence and gaps for the Spain 35 index:

    • trending_upFriday 6 October close at 10,177 to Monday 9 October open at 10,311 = 134 point gap higher
    • trending_downMonday 9 October close at 10,225 to Tuesday 10 October open at 10,193 = 32 point gap lower
    • trending_upTuesday 10 October close at 10,138 to Wednesday 11 October open at 10,306 = 168 point gap higher

  • trending_down6 October 2017: With a constitutional crisis in Spain there is plenty of overnight slippage. We saw another gap last night.

    The relatively short trading hours of the Spain 35 spread betting market don’t help. The hours are just 8am to 4.30pm (UK time). This means there is a lot of time for news-based-pressure and positions to be built up overnight.

  • trending_down4 October 2017: After Catalonia’s independence referendum, and the police got very heavy handed, the Spain stock market gapped lower over the weekend from 10,354 on the Friday to open at 10,223. That’s a nasty 131 gap but it should be manageable with sensible stake sizes. Also see Spanish stock market spread betting.

  • trending_down17 Aug 2017: Snap Inc was expected to report poor data and it duly did. And it still gapped. See Snap Spread Bets End on a Whimper – see examle below.

  • trending_upJuly 2017: Netflix released good Q2 data and the Netflix share price jumped 14% higher. For the bears this included a particularly unpleasant 8.5% gap higher.

How to Protect Your Trades Against a Gap / Slippage

  1. Use a Guaranteed Stop order aka Guaranteed Stop Loss order aka ‘GSL’.

    A Guaranteed Stop Loss order works in the same way as normal Stop Loss order, except that they ‘guarantee’ to close your trade at the level of the Stop, regardless of any gapping / slippage.

    There is normally an extra cost for this level of insurance but Financial Spreads and IG now only charge their clients if the order is triggered. I.e. if you close a spread bet yourself, or if your spread bet hits a Limit (take profit) order, they won’t charge the Guaranteed Stop Loss fee.

    At SpreadBetMagazine, we like this because it’s a bit like only paying for your car insurance if you have an accident.

  2. Consider adding a Guaranteed Stop Loss over the weekend. At the moment, only Financial Spreads will let you do this for free.

    I.e. add a GSL to your trade before the market closes on the Friday. If the order is triggered then you still pay the fee (about 3-5 times your stake depending upon the market) but any losses will be limited.

    If the GSL is not triggered over the weekend, just remove it on the Monday morning and use a normal Stop Loss.

    (Remember, it doesn’t matter which spread betting firm you use, if the market is closed, you can’t add/adjust/remove a Guaranteed Stop or Stop Loss order.

  3. Consider closing your trades over the weekend. I know a number of professional traders who close trades on a Friday afternoon and then re-open them on a Monday morning. These traders are happy to accept the cost of closing and re-opening a trade vs the risk of a gap due to news that comes out over the weekend.

  4. Think again before you trade illiquid (less popular) markets e.g. soft commodities. These markets are more likely to gap. Companies with smaller market capitalisations are also more likely to gap.

  5. Think again before trading ahead of big news events like the monthly Nonfarm payrolls, these events often cause rapid market movements.

  6. Think again before trading in highly volatile markets, again, these are more likely to gap.

  7. Think again before trading US stocks that have large share prices e.g. Google’s $945 share price (see below for why a big share price causes problems).

  8. Try trading with a smaller stake size. Your potential profits won’t be as big but your potential losses, with or without gapping, will be smaller.

Stop
Don’t Forget to Use Stops or Guaranteed Stops


Why Are Gaps Such A Problem?

A sudden movement in the market against your position, such as a gap or slip, could mean that you lose more than you deposited in your spread betting account.

The standard risk management order in spread betting, CFD and forex trading is the ‘Stop Loss’ order.

I.e. an order you add to your trades to close them at pre-determined levels. If you have a losing trade and the market hits the level of your Stop Loss it will close the trade.

This means that you are able to automatically close trades and cut your losses if the market moves against you.

These standard Stop Losses are not infallible though.

A Stop Loss order will close your trade at the best available price once the Stop Loss level has been hit.

In a normal market, your trade is closed at the same level of your Stop Loss.

However…

If the market gaps across the level of your Stop Loss, i.e. the market doesn’t trade at the level of your Stop, your order will be placed at the ‘next‘ price level the market trades at.

If the market has a big gap, i.e. there’s a big slip from one price level to another, then your trade will be closed that next price level and your losses could be far larger than you expected.


Further Risk Management Guides

Snap Gap – A Longer Look at a Real Market Gap
Snap Inc. did not have a great IPO.

4 months after the messaging firm listed, even their lead underwriter, Morgan Stanley, downgraded the target price of the stock to $16 (below the $17 dollar IPO level).

The chart below shows how the stock gapped down overnight on the news of the downgrade.

I.e. it closed on the Monday at 1696¢ and on Tuesday it opened at 1631¢ i.e. a gap of 65 points.

Snap Gap
Snap Gap I


Warning When Trading US Stocks

Remember, with spread betting and CFDs, when you trade US stocks, you normally trade per 1&cent. While Snap fell 4%, luckily for investors, the stock was only priced at ~ $17.

Other US stocks have a much larger share price, e.g. the Google (Alphabet) stock is trading around the $945 level. If that fell 4% that would be a drop of $37.8… or put into spread betting terms… you could be nursing a loss 3,780 points = a loss of 3,780 x your stake!

Please be very careful when spread betting on US shares or… just don’t trade them.


Gapping Aftershock

One gap was not enough for Snap.

The chart below shows how the market gapped lower again on the same Tuesday.

At 16:33 the price was 1592.5¢, it then gapped 28.5 points lower to 1564.0¢.

Snap Gap II
Snap Gap II


Worked Example of Gaps vs Guaranteed Stop and Stop Loss Orders

Let’s say you have bought Easyjet at 1750p and want 1500p to be your maximum loss level.

You could set a Stop Loss order to close your trade at 1500p.

You could also use a Guaranteed Stop order to ensure that if the Easyjet share price drops to 1500p, your spread betting platform, will automatically close out your trade at 1500p, irrespective of any gap.

Let’s say that there’s another ash cloud over Iceland, or perhaps a spike in crude oil prices, or another issue that hits the airline’s share price. If so, the share price could gap down from anywhere above 1501p to 1450p.

A Guaranteed Stop will close your trade at 1500p.

A normal Stop Loss order will close your trade at 1450p.

As an investor you need to judge the risk of a market gap vs the increased cost of using a Guaranteed Stop.


The Good News About Guaranteed Stop and Stop Loss Orders

Neither a Stop Loss or Guaranteed Stop will put a limit on your profits.

These orders are just there to help limit your downside, they don’t put a limit on your profits.

If you want to add an order to your trade so that it closes when it hits your target profit level, just use a ‘Limit order’, aka ‘Take Profit order’.


AuthorAlex Turner

Senior Editor, SpreadBetMagazine

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Snap Inc Spread Betting and CFD Trading Guide

[…] Snap has given a textbook example of how a couple of ‘gaps’ in this week’s volatile price movements can hurt investors. See ‘snap gap’ charts. […]

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