Overnight gap risk: why stocks are different from forex
Explain why equities create overnight gap risk that forex pairs do not, and what that means for sizing and stop placement.
Lesson path
Stocks, ETFs, and Equities Macro
Trading Equities vs Other Markets
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Explain why equities create overnight gap risk that forex pairs do not, and what that means for sizing and stop placement.
Why a stock chart has gaps and a forex chart doesn't
Pull up a daily chart of any US stock. You'll see candles that don't touch. There's empty space between yesterday's close and today's open. Now pull up a daily chart of EUR/USD. The candles join cleanly — close of one is the open of the next. That gap on the stock chart is the single biggest structural difference between trading equities and trading currencies, and it changes how you have to size, stop, and plan every trade.
The US equity market closes at 4:00pm ET and reopens at 9:30am the next morning. That's 17.5 hours during which the world keeps spinning — earnings reports get released after the bell, CEOs resign, regulators issue rulings, wars break out, central banks talk. None of that news gets priced into the stock while the market is shut. It all hits at once when the opening auction clears the next morning. The result is a gap up or a gap down. The stock didn't trade through the prices in between. It jumped over them.
Forex is structurally different. The interbank currency market is open from Sunday evening to Friday evening, 24 hours a day, across Tokyo, London, and New York sessions. When one venue closes, another is already trading. Price moves smoothly through news events because there is always a market open to absorb the order flow. A trader holding EUR/USD over a Federal Reserve announcement sees prices tick through every level. The chart slides. The stops work. That's not a forex advantage in every way — there are other tradeoffs — but it eliminates the single most dangerous risk in equities.
What this means for your trade plan: when you hold a stock overnight, you have to size it as if the stop might fail. A common rule of thumb is to assume a 1.5-2x worst-case slippage on overnight positions through scheduled news (earnings, guidance, FDA decisions) and roughly 1.2x on plain overnight holds. If a 1R stop is $200, your gap-adjusted worst case is $300-400. Size the position so you can survive that.
Recap: stocks gap because the exchange closes; forex doesn't because the market runs continuously. Stops don't work across gaps. Size overnight equity positions for the gap scenario, not just the intraday stop.
Knowledge check
Answer before moving on.
1. You're long a stock at $100 with a stop at $98. The company reports bad earnings after the close. The next morning, the stock opens at $91. Where does your stop execute?
2. Why doesn't EUR/USD have the same gap problem on its daily chart?
3. You normally risk $200 per trade. You want to hold a position through an earnings report. What's the most sensible adjustment?
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