Serious Question: Can Stops Fail In A Market Crash?

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ByLoSellHi

For those experienced traders who have lived through 7% or greater single day drops (I have not traded in these conditions);

1) Can stops fail to get a trader out at close to the approximate stop price (I assume this is more likely to occur in smaller cap, lower volume stocks)? When I ask if "they can fail," what are are the odds for a liquid, high volume stock?

2) Is a stop-limit a better option for those trying to limit damage on calamitous days?

Thanks.
 
Yes you can miss getting filled anywhere near your level if there are a lack of bids for your stop to trade against. Think about the aftemarth of 9/11 it was nightmare

As for a stop limit what if the market keeps going you will never get filled unless the market comes back up.
 
On really bad days like 9/11 and during market crashes the only thing that will save you is cheap far OTM index puts that you always carry as insurance. Even the most liquid vehicles like stock and bond futures can gap down/up as bids disappear and if the market closes then your stop is worthless. Stops are not good protection against calamitous events imo as you may not be able to exit at any reasonable price.
 
Assuming you trade short and long then a major market "event" has a reasonable chance of making you happy.

911 killed me on swiss francs but I made on euro and gold. Overall good despite having to wait days to close those positions.
 
Fwiw, I went to an options class taught by a broker, that question came up and he said that in Oct 1987 he had stops on IBM and blew right past them. I left with the impression there is no mercy. Normal is just a setting on my dryer. As in normally, a stop would protect you.
 
There is a camtasia floating around on the 27FEB07.

We had the DOM and the charts running as well as the tick charts and stretch squeeze

There is audio with it maybe. If it is not on the camtasia there is an audio narration as well.

You can see how "protection" isn't really protection at all.

It is the opposite, in fact.

It was very noticable as the people who blew out their accounts dissappeared. This is most evident on the T&S as something to look at as you see the orders showing going to market orders and the four games usually played cease and desist.

We will probably turn this into an instructional video soon.
 
Thank you all.

This is what I suspected. If Feb 27 permanently blew out traders, as Jack mentioned, then I shudder at what another Black Monday would do to those who falsely think they have limited loss risk.

The cheap OTM put heding is intriguing, but I would assume you'd have to be extraordinarily OTM for the additional expense not to create substantial drag on one's returns.
 
Most brokers now have something similar to trade triggers where you can tell them if the stock reaches a certain price to sell at market. All of my stops are of this type. They will always be filled if you make it a market order after the price trigger is hit.
 
Stops are worthless, tight stops almost always get hit on just normal volatility. Loose stops are there to protect you in case of catastrophe, but they can be blown through in a real one.

There are only 2 'protections'... having puts in place in times of uncertainty to protect your main holdings, and physically watching the market and getting ready to hit the 'Market Order' button, you get what you get.

What prompted this paranoid question:P?
 
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