risk
Prices Jump, They Don't Glide
The rule
Prices move in sudden jumps, not smooth steps. The level you planned to act at can simply be skipped over overnight.
Where it flips
Fear of gaps can push you to trade too much or watch the screen all day, which usually costs more than the rare jump. The fix is to size holdings so a gap is survivable, rather than pretend an order guarantees your exit price.
Textbook models imagine a price sliding gently from one number to the next, touching every value along the way. Mandelbrot showed markets really gap - a stock closes at ₹500 and opens at ₹430 with nothing traded in between. That matters because a stop-loss, a hedge or a 'sell if it drops to' plan assumes you can act at the level you chose. A jump denies you that chance.
A worked example
Aayra sets a stop-loss to sell a stock at ₹480. But bad results overnight make it open at ₹420. Her order fills at ₹420, not ₹480, so the protection she trusted let ₹60 a share of extra loss straight through. [illustrative]
How to spot it
- ·An opening price far from yesterday's close
- ·A stop-loss that filled well past its trigger
- ·'The hedge should have caught this' after a shock
Benoit Mandelbrot · The (Mis)behavior of Markets