Gaps, slippage and tail risk
When your stop is not your exit. · 4 min
A stop order becomes a market order when touched. If the market gaps past it (overnight news, earnings), it fills at the first available price: the open. A planned −1R loss can become −2R or −3R.
Slippage is the difference between the price you expected and the fill. It is small in quiet markets and large in fast ones. The simulator charges one tick on market orders and stops, and fills gaps at the open.
Real returns have fat tails: moves of five or more standard deviations happen far more often than a normal distribution allows. The simulator draws its shocks from a Student-t distribution for this reason. The practical rule: size for the gap you could get, not only for the stop you set, especially into scheduled events.