Why Is My Stop Loss Not Working

Summary

This video delves into the perplexing issue of stop losses not being triggered as expected in the stock market. It uses the dramatic price drop of stock SN CA to illustrate why stop-loss orders may not execute at the desired price during rapid market movements. The presenter explains that a stop-loss is not a guarantee of sale but a conditional order to sell if the stock reaches a certain point. The video clarifies the role of market makers in fulfilling orders and how a lack of buyers during a sell-off can result in orders being filled at lower prices than anticipated.

Takeaways

• 📉 Stop losses may not always trigger at the desired price due to market dynamics and lack of buyers at the specified price.
• 🤔 A stop loss is an order that indicates a willingness to sell if the stock reaches a certain price, but it does not guarantee execution at that price.
• 🚀 The video uses the stock SN CA as an example to illustrate a dramatic price drop, emphasizing the unpredictability of stop loss execution.
• 🛑 In a panic sell situation, where many are trying to sell at once, stop loss orders may not be filled due to overwhelming selling pressure.
• 🛍️ The stock market operates on transactions; without a buyer at your desired price, your sell order, including a stop loss, may not be executed.
• 🔄 Market makers play a significant role in controlling the bid-ask spread and are often the counterparty in limit orders, including stop losses.
• 🛑 If there's a lack of buying interest when your stop loss is triggered, the order may be filled at a lower price as market makers are not obligated to buy at the stop loss price.
• 📈 Understanding market mechanics is crucial for investors to set realistic expectations about the execution of their stop loss orders.
• 🤝 The interaction between buyers and sellers, including market makers, determines whether a stop loss order will be filled at the desired price or not.
• 💡 The video suggests that while stop losses are a tool for risk management, they are not foolproof and investors should be aware of the potential for slippage.
• 📚 Educating oneself on how the market operates, especially during volatile times, can help investors better understand and manage the risks associated with stop loss orders.

Q & A

What is the main issue discussed in the video script?

The main issue discussed is why stop losses sometimes do not get triggered at the specified price, leading to a sale at a lower price.

What is an example of a stock movement used in the script to illustrate the issue?

The script uses the example of stock SN CA, which tanked from about four dollars down to around one dollar seventy-five, to illustrate the issue of stop losses not being triggered.

What is the purpose of a stop loss in trading?

The purpose of a stop loss is to set a price point at which a trader would like to exit their position if the stock reaches that price, although it does not guarantee a fill at that exact price.

Why might a stop loss order not get filled at the desired price?

A stop loss order might not get filled at the desired price due to a lack of buyers at that price during a rapid sell-off, resulting in the order being filled at a lower price.

What is a 'panic sell' as mentioned in the script?

A 'panic sell' occurs when everyone starts hitting the sell button all at once, often leading to a rapid decline in the stock price and potentially causing stop loss orders not to be filled at the desired price.

What role do market makers play in the execution of stop loss orders?

Market makers control the spread between the bid and the ask prices. They are often the ones who fill or execute stop loss orders, especially when there is a significant sell-off and not enough buyers at the stop loss price.

Why might a market maker not buy shares at a trader's stop loss price during a sell-off?

A market maker might not buy shares at a trader's stop loss price during a sell-off because they anticipate more sellers coming and the price going much lower, making it unattractive for them to buy at the current stop loss price.

What does the script suggest about the likelihood of a stop loss order being filled by an individual trader versus a market maker?

The script suggests that 90% of the time, stop loss orders are filled or executed through a market maker rather than an individual trader.

What is the difference between a market order and a limit order as it pertains to stop losses?

A market order is an order to buy or sell a security at the best available price in the market. A limit order is an order to buy or sell a security at a specific price or better. A stop loss is similar to a market order in that it triggers a sale at the current market price once the stop loss price is reached.

What advice does the video offer for traders to better understand their stop loss orders?

The video advises traders to understand that stop losses are not guaranteed fills at the set price and to be aware of market dynamics, such as sell-offs and the role of market makers, which can affect the execution of their orders.

How can traders potentially avoid having their stop losses triggered at undesirable prices?

Traders can potentially avoid having their stop losses triggered at undesirable prices by setting them at levels that account for market volatility and understanding that during rapid sell-offs, there may be a delay in order execution until a buyer is found at a lower price.