A trader holds a $50,000 long position overnight. Stop-loss sits 2% below entry — clean, disciplined, textbook. Markets close. Overnight, the company announces an earnings miss. The stock opens 18% lower. The stop executes at the open price. Loss: $9,000. The stop did its job. Gap risk made it irrelevant.

Gap risk is the exposure that exists between a market's close and its next open. Prices don't negotiate with your stop-loss orders in after-hours darkness. A position sized for a 2R loss can silently become a 9R catastrophe by 10:01am. The gap doesn't care about your system.

CONCEPTGap risk is the uncontrollable price movement between market close and next open — stops cannot protect you inside this window.
WARNINGHolding full-size positions overnight in high-volatility or earnings-season stocks multiplies gap exposure beyond any stop-loss system's reach.
KEY IDEAReducing overnight position size — not tightening stops — is the primary mechanical defence against gap risk.

The structural defence isn't a tighter stop. It's a smaller position. If a trader's standard risk per trade is 1% of a $100,000 account ($1,000), overnight positions might be sized to risk 0.3% — $300 maximum. That way, even a catastrophic 20% gap on a concentrated stock keeps total damage to roughly $300 in expected-case, with worst-case remaining survivable.

Gap Loss: Full Size vs Reduced Overnight SizeFull Size−$9,000Half Size−$4,5000.3x Size−$1,350$0$9k

Three rules define a workable overnight framework. First, avoid holding individual equities through scheduled earnings announcements — that's a known gap-risk factory. Second, cap overnight exposure across all open positions to no more than 5% of total account equity. Third, treat index futures and liquid ETFs differently from single stocks; their gaps are typically smaller, though never zero. Traders researching this further can read about price gaps on Investopedia, study risk management frameworks on Wikipedia, and review position sizing methodology on Investopedia to build a coherent system.

Gap risk can't be eliminated — only priced in advance through position sizing. Build the overnight gap into the trade before it opens, not after it bites.

This content is for educational purposes only and does not constitute financial product advice. Past performance is not indicative of future results. Profit Logic Ltd (ACN 688 669 936) accepts no responsibility for errors or omissions in this content or anywhere on this website. Always seek advice from a licensed financial adviser before making investment decisions.