I have warned investors many times about the undependability and general riskiness of using stop-loss orders. When markets get volatile it’s hard to beat the folks with the best technology. And even when you’re competing on even ground, markets can simply become overwhelmed with stop-losses in a panic. Then your money is facing terrible odds. Dick and Matt Young and I made not using stop-losses our number one recommendation for 2016. This turned out to be good advice, especially if you were trading in currencies this year. Chelsey Dulaney writes at The Wall Street Journal.
A report from the currency trading platform FXCM Inc. showed that between January 2015 and March 2016, 40% of stop-loss orders and similar trading mechanisms executed on its platform were filled below the price level that investors had requested.
This so-called “negative slippage” has become the norm for larger currency trades: About 95% of orders over $10 million were executed below investors’ chosen price in the first quarter of this year, according to the FXCM report. FXCM didn’t say by how much the trades were made below the stop-loss pricing level.
“I can’t tell you how many times I was completely burned by it,” said Paresh Upadhyaya, director of currency strategy at Pioneer Investments. “What’s the point of a stop-loss if I don’t get it done around the level I left in the market?”
He said stop-loss orders have been filled as much as half a percent off the requested price, which for multimillion-dollar trades could mean tens of thousands of dollars worth of additional losses. “It was just painful,” Mr. Upadhyaya said.
Analysts say the challenge for stop-losses is they are trying to hit a moving target. Investors select the level at which they want their position sold, but a trader or algorithm can’t always execute at that price before the market moves lower.