Now, you are hoping to make some money on this stock (or part of it) over time, so you leave it overnight and come to check up on it the next day. Suddenly, your portfolio is empty and the position is not there. Why did this happen? Perhaps the stop-loss was triggered and now the remaining $80 is back in your account? Instead, you might discover that you haven’t lost $20 but instead, as much as $40 or $60 when your trade was closed! Why did that happen? Is eToro a scam and stop-losses don’t work? The answer is no of course and instead, you found yourself in this situation because of a market phenomenon called price gapping.

The first thing to understand about the entire process is that markets are not open all the time. Apple is traded on NASDAQ, a USA-based exchange, which closes and opens at certain hours only, like any other business. When you trade Apple stocks (or stocks of any company registered on this exchange) you can actually only do so when this exchange is open, during its working hours. But that is not the only time trading can occur, as you might have placed your trade during hours it was closed. Before and after markets like NASDAQ are open (or in technical terms, pre-market and after-market hours) there are still traders who can trade Apple stocks and consequently move its prices. Why can’t anyone do so? Well, it is only a very limited number of brokers that allow their investors to trade on these outside market hours and eToro provides trading opportunities within market hours only. In fact, trading outside market hours can be very risky and volatile and these trades are completed on electronic communication networks (ECN) outside the usual stock exchanges. Such orders tend to face higher liquidity risks, wider spreads, and rapidly changing prices.

After you completed your trade while the market was open, some terrible news comes out on Apple in the evening, for example, a fraud scandal or an unpromising earnings report is released and investors massively lose their trust in the company. After the market investors that no longer believe in the company start selling its shares in large volumes. Consequently, because of the increased supply of these stocks on the market, the price goes down, by the basic economic law of supply and demand. What you see for your trade on the platform though is the old latest price the asset was traded at when NASDAQ closed the day before. So the price shall remain the same and it will only be updated on the eToro feed when the markets open the following day. So despite the markets being closed at the time the price is actually decreasing. Despite the after-market trading has caused several up and down changes in price after NASDAQ closed at 16.00, as shown below.

The price on eToro shows the closing price and does not reflect these outside market hours changes yet and stays at yesterday’s closing level.

What we can see is that actually the real price at the moment right now is different from its yesterday closing price and although the price is changing in real time the price that you see on the platform is the same. The next day when the markets open the price that Apple will be trading at on eToro is going to change and it will finally reflect the actual price that accounted for the effects of trading that happened after the market closed yesterday and before it re-opened today. Many times these changes are relatively minor (as in the example above) and could even be profitable for you.

But lets get back to our unfortunate $100 trade. Now the stop-loss level you have set for your trade is linked directly to the real-time price from NASDAQ, and although the price might have gone down well below the $20 you have set, eToro will not realize that until the markets re-open and the lower price of this stock will be updated. Only then the stop-loss comand shall trigger even though you might have lost much more than the original level you set for this position.

Of course if the price drops down during the open times of the stock exchange when the price on eToro is being constantly updated according to it, the stop-loss will be triggered as soon as those $20 are lost as you have set up. When this situation happens outside market hours like in our example, eToro will close down your trade at the next best possible price level as soon as it sees the price went down way below your stop-loss level, for example to $70 or $60. That is much more than you originally planned to lose.

We can also visualize this situation on charts. Each candlestick bar on a price chart represents a one-day time frame of trading. If the bar is red, it means the opening price was the one at the top of the bar and it closed at the bottom of it, meaning the asset decreased in value. For the green bars the opposite is true, and the lower opening price went from the bottom of the bar to the top, meaning the price appreciated. Sometimes there is a gap between yesterday’s closing price and today’s opening price and that is what a price gap looks like on a price chart.

As you can see there are certain discontinuities or gaps between previous day’s closing prices and opening prices of the next day. Some of them are more noticeable, going against previous day’s trend and some of them are relatively minor.