Gap

A stock closes at $50 on Monday. Overnight there’s news, and on Tuesday it opens at $46. That $4 is a gap: the price didn’t travel from $50 to $46, it just reappeared there. Nobody bought or sold at $49, $48 or $47, because the market wasn’t open for them to.

That’s what makes a gap different from an ordinary fall, and it’s why a protective stop doesn’t cover it. A stop at $48 is an instruction to sell once the price trades at $48 or below. In a gap, the first price that trades is $46 — so that’s roughly where the stop sells. It fires, as instructed; it just can’t sell at a price that never existed.

Gaps go both ways, and most are small. The big ones cluster around scheduled news — an earnings report above all — which is the useful part: you can often see the occasion coming, even though you can’t see the direction.