Market Gap
Definition
A market gap occurs when the price of an asset jumps from one level to another without trading at prices in between. Gaps typically happen between trading sessions or after major news. When gaps occur, orders such as stop losses may execute at significantly worse prices than expected, making broker execution policies and protections critical.
In Plain English
In plain terms, a market gap is a jump in price. Instead of moving smoothly from one price to the next, the market opens or reopens at a very different level. This means trades that were meant to close at one price can be filled at another, often less favourable, price.
How It Works
- A market closes or trading activity becomes very thin.
- New information emerges (such as earnings, economic data, or geopolitical events).
- When trading resumes, buyers and sellers are willing to trade only at prices far from the previous close.
- The first available price is significantly higher or lower than before.
- Orders waiting in the system are triggered at the next available price.
- Stop losses convert into market orders and execute after the gap.
- Limit orders may not execute at all if their prices are skipped.
- The final execution price reflects available liquidity, not the original stop or limit level.
Why This Matters for Traders
Market gaps can override normal risk controls. Stops do not protect against gaps, and losses can be larger than planned. For leveraged positions, gaps can rapidly consume margin and trigger stop-outs or negative balances. Understanding gap risk is essential for anyone holding positions overnight, over weekends, or through major events.
Common Misunderstandings
- Stops always protect against losses: gaps can bypass stop levels.
- Gaps only happen in small or exotic markets: major indices and FX pairs can also gap.
- Gaps are broker errors: gaps originate from market conditions.
- Guaranteed stops are unnecessary: gaps are where guarantees matter most.
- Gaps only affect long positions: short positions are equally exposed.
How This Affects Broker Choice
Broker handling of gap risk varies meaningfully. When comparing brokers, users should consider:
• Availability and cost of guaranteed stop losses.
• Negative balance protection policies.
• Execution transparency during market reopens.
• Margin and stop-out behaviour following gaps.
• Historical handling of extreme market events.
From a monetisation and comparison perspective, gap risk is a strong differentiator between brokers with robust client protections and those that shift more risk onto traders, supporting links to broker reviews and protection-focused comparisons.
Risks & Common Mistakes
• Holding leveraged positions over weekends without accounting for gap risk.
• Relying solely on standard stop losses for overnight protection.
• Underestimating how gaps interact with margin and leverage.
• Trading illiquid instruments prone to frequent gaps.
• Choosing brokers without clear gap-handling disclosures.
Risk note: market gaps can cause rapid, outsized losses and may lead to forced closures or negative balances during extreme events.
Real-World Example
A stock index closes at 7,000 on Friday.
• Over the weekend, unexpected news emerges.
• The market reopens on Monday at 6,850.
A stop loss placed at 6,950 does not execute at that level. Instead, the trade closes near 6,850, resulting in a larger loss than planned due to the gap.
What to Check Before Trading
- Does the broker offer guaranteed stop losses?
- Is negative balance protection in place?
- How does the broker handle stop execution after gaps?
- Are margin requirements adjusted before known gap-risk periods?
- Does the broker publish policies for extreme market events?
- Which instruments are most prone to gaps?
- Are trading hours and session breaks clearly documented?
Related Concepts
Standard stop losses do not protect against gaps.
Guaranteed stops cap losses during gaps.
High volatility increases gap risk.
This limits losses when gaps cause extreme moves.
Gaps commonly occur between trading sessions.
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Risk Warning: This website does not provide financial, investment, or trading advice. All information is for educational purposes only. Trading and investing involve substantial risk of loss. You should carefully consider your financial situation and consult with qualified professionals before making any financial decisions.