Risk / WORKSHOP
A stop starts with invalidation, not a convenient distance
A protective level defines a plan, not a fill price. Explore a price gap and the difference between stop and stop-limit orders using invented shares.
How it works
Identify the move that invalidates the idea, then size the position. For a conventional stock stop order, meeting the trigger condition turns it into a market order. A stop-limit order activates a price limit instead; it may remain unfilled.
Invalidation on a candle close and an intraday protective order are separate conditions. Ask the broker what triggers the order: a last trade or a quote, which hours apply, and how partial fills are handled. Stock order rules cannot be assumed for futures or CFDs. A stop-level calculation describes planned loss before costs; a price gap can produce a larger actual loss.
What to check
- Identify invalidation; do not move it closer just to make the size calculation fit.
- Separate the trigger price, limit price and actual fill prices.
- Check order type, trigger conditions, active hours and treatment of a partially filled remainder with the broker.
- Calculate all filled portions; while part of the position remains open, the complete result is unknown.
A hypothetical example
All figures are invented; these are separate scenarios for 20 shares bought at 100 monetary units. Commissions, taxes and dividends are excluded. Support is 98, stop level 97.5: planned loss (100 − 97.5) × 20 = 50. In scenario A the stop condition has already triggered after a price gap. 12 shares sell at 96, another 8 at 95.5; the entire position is closed. Average fill price (12 × 96 + 8 × 95.5) / 20 = 95.8. Realized loss is 12 × 4 + 8 × 4.5 = 84, exceeding the plan by 34. In independent scenario B a sell stop-limit with trigger 97.5 and limit 97 also activates, but available bids stay at 96 or below. No sale occurs: 20 shares remain open. At a hypothetical valuation of 96, the paper loss is 80; this is neither a realized result nor a guaranteed future exit price.
When to skip
Do not submit an order when trigger conditions, active hours or treatment of the remainder are unknown. If the minimum quantity at the chosen distance exceeds the budget, skip the entry; do not substitute a convenient protective level.
Counterexample: “a stop at 97.5 guarantees a loss no larger than 50” is contradicted by fills producing a loss of 84. Switching to a stop-limit at 97 does not guarantee an exit: bids at 96 or below leave it unfilled. If only 12 shares sell at 96, realized loss is 48, but 8 shares still carry risk; the entire position cannot be declared closed at a loss of 48.
Try it yourself
On a practice account or in a journal, model both scenarios without live orders. Record type, trigger, limit, quantity of each filled portion and remaining quantity. Compare planned, realized and paper losses. Before the next calendar event, check the primary release schedule and the broker’s order rules first; a scheduled release alone does not determine trade direction.
In scenario A, find planned loss, average fill price and realized loss. If only the first 12 shares fill, how many remain? In scenario B, why does the order not sell at 96, and how does the paper loss of 80 differ from realized loss?
Show explanation
Planned loss: 50. Average price of the complete fill: 95.8. Realized loss: 84, exceeding the plan by 34. After the first portion, 8 shares remain; 48 is realized, while the open remainder’s final result is unknown. A sell limit at 97 permits sales at 97 or higher, so bids at 96 are insufficient. Without a sale there is no realized result; the paper loss of 80 changes with the open position’s valuation.
Trigger price, fill price and closed quantity are three separate values. A stop may fill worse than planned; a stop-limit may leave the position open.
Sources and definitions
SEC Investor.gov: Understanding Order Types ↗SEC Investor.gov: Stop, Stop-Limit, and Trailing Stop Orders ↗CME Group: Proper Position Size ↗TradingView Pine Script: Strategies ↗Scenarios and exercises are educational FINBORS examples, not a verified trading strategy.