Why the spread widens causes stop-loss to trigger sooner: buy stop-loss is determined at the selling price

I am Yohaku, creating MT4/MT5 indicators and handy tools. What I build is decided from the complaints that appear in GoGoJan reviews and questions.

Among them, there is feedback like, “When I placed my stop loss near, it hit much sooner than I expected.” It’s the story of the price not moving as much as you thought, yet hitting the stop loss. Since this tends to occur during times when the spread widens, I’ve organized the mechanism.

Conclusion up front

• For long positions, stop loss is determined at the selling price (Bid). When the spread widens, the Bid price falls, so the stop loss hits earlier.
• The closer the stop loss is, the more it is affected by the spread widening.
• On accounts with round-trip commissions, you also factor the commission into the loss when deciding the lot size.

Buy entered at the bid price, settled at the ask price

There are two prices on the chart: the buy price (Ask) and the sell price (Bid). The difference between them is the spread.

• Buys are entered at the buy price (Ask). Settlements are made at the sell price (Bid). Stop losses are also determined at the sell price (Bid).
• Sells are the opposite: entered at the sell price (Bid) and evaluated at the buy price (Ask).

If you place a long stop loss below the current price, it will be triggered when the Bid price falls to that stop level. What matters here is the Bid price, not the Ask price or the midpoint of the two.

When spreads widen, stop losses hit sooner

When spreads widen, there are times when the buy price doesn’t move much, but the sell price drops.

Since long stop losses are determined at the sell price, if the sell price moves down first, the stop loss will be hit even if the market hasn’t moved as much as you thought. This is the essence of “it hit sooner than expected.”

Spreads tend to widen around major economic data releases, during early morning hours, or at the start of the week when trading is thin. Even normally narrow instruments can widen several times during those periods. In my demo MT4 account, GOLD’s spread reached 45 points (0.45 dollars) during such times.

The closer the stop loss is, the greater the impact

Even with the same spread widening, the effect varies depending on the distance to the stop loss.

If there is only 10 points to the stop loss and the spread temporarily widens by 20 points, the Bid price will cross over the stop loss level just by that widening. If there are 300 points to the stop loss, the same 20-point widening is less likely to reach the stop loss.

In short, the closer you place the stop loss, the more room there is for “movement opposite to the market direction” to hit it when spreads widen. This effect is especially pronounced when placing stop losses a few points to a few tens of points on shorter timeframes.