Handling Stop Loss Orders During Market Open Price Spikes

I’ve encountered a challenge with pre-market orders and managing risk due to price fluctuations at market open. Specifically, if I place a buy order before the market opens with a stop loss set at 1% below the pre-market price, there’s a potential issue due to the timing of order execution. Often, the market price can surge right at opening – suppose it climbs 10% – but my order might not get filled until the price has already increased by 5%. Consequently, if the stock’s price then plummets to my stop loss level, my loss isn’t the planned 1% but rather an unexpected 6%.

This discrepancy poses a significant problem for my trading strategy, undermining my risk management plans. It’s perplexing that there seems to be no straightforward mechanism to adjust for this kind of volatility and execution delay.

Is anyone else experiencing similar issues? How do you handle stop loss settings for orders placed before market open to accommodate for these sudden price jumps? I’m considering the possibility of implementing trailing stop losses as a solution, but I’m uncertain about their effectiveness in this context.

Any advice or experiences shared would be greatly appreciated.

@Roi_Bel I definitely appreciate the challenges of entering orders before the markets open. I found for me there are really two issues 1) volatility - the first 15 minutes or so of trading can have large price swings and 2) the signal that I used to determine a buy or sell was simply wrong.

An example of the latter would be buying on positive pre-market earnings announcements. I would place an order pre-market to fill at open with expectations the price would go up throughout the day. However, the price goes down. Even though there was positive earnings it apparently wasn’t good enough and the price drops.

What I have begun doing is to not enter orders pre-market. I wait until 15 minutes after the markets open (though nothing magic about the timing) and then enter my orders. I use the same logic/signals as I would have used to submit the orders pre-market except I add one more condition. If the order was to go long then the current price (at 9:45 ET) must be greater than the open, or if the order was to go short, the price must be less. Basically, the price must be going in the expected direction.

I need to do more detailed analysis of this approach, but so far, at a high level it seems to be working well. There definitely are not the large swings, and associated losses, at market open either because of volatility or the stock simply going in the wrong direction. Some of the gains are less since a position was not entered exactly at market open, however the somewhat reduced gains are more than offset by the reduced losses.

This of course won’t work for all strategies but may be something to consider.

Thanks a ton for sharing your insights and approach! It’s incredibly helpful to hear about your method, waiting until after the initial volatility settles down before placing orders is an amazing idea. It makes a lot of sense, and I’m keen to consider this strategy to avoid the early market swings and align better with the actual market direction. Your experience offers me a super valuable perspective.

Just to circle back on one of my initial concerns, do you think incorporating trailing stop losses could still be a viable option in this context?

Thanks again for your valuable advice!

@Roi_Bel In theory, I am a fan of trailing stops rather than fixed stops. My thinking is one probably wants to close a position if it looks like it’s moving in the wrong direction (eg going down if you hold a long position). That movement really depends upon the latest price and is independent of the initial price one paid. Using a trailing stop, one can monitor the price movement relative to recent prices. Using a fixed stop one simply monitors the price relative to a (somewhat arbitrary) initial price one paid.

As an example, look at the following chart. Assume one entered a position at the opening price of 4.24 and immediately set up a fixed stop around 4.20. The price goes up to about 4.28 but then begins to drop. A trailing stop would be set relative to that high around 4.22. As the price drops the trailing stop will close the position before the fixed stop at less of a loss. In fact, a trailing stop can potentially close a position at a gain, while by definition, a fixed stop will always close at a loss. It’s that ability to being able to capture a gain that I like about trailing stops.

Now notice I started by stating “in theory” I like trailing stops. The problem with basic trailing stops and any stop is that all it takes to trigger is a single trade. One will find that stops get triggered “prematurely” quite often. To avoid this, I don’t use actual stop orders but rather simply monitor prices (or potentially trades or quotes). The algo can then ‘smooth’ these values and trigger a sell based upon a ‘smoothed’ value which isn’t as ‘trigger happy’ as a regular stop order. I personally just keep a take profit limit order always open, then if my algo trigger is reached I replace the limit price with a marketable price which then immediately closes the position.

That’s a great idea, although it’s probably not one I’ll implement because there’s a good chance my trade wont fill. Basically, I’ll just pray for my orders to get a good price in the Opening Auction. Thanks for all the help!