During sudden drops in ES (e.g., drop of more than 3-4 ticks in a second), how effective is a stop with a limit 2 ticks lower during the day? How about at night? I'm guessing not very effective but I don't have personal experience with it, so I'm looking for everyone's experience with getting a stop limits filled during sudden drops. Thanks.
Why risk it? Better to have a stop market filled on a fast drop with slippage, than a stop limit not getting filled at all, and the world of hurt that may bring. I realize this does not answer your general question, but in my mind, it is a no brainer. Always use market for stops. On either side! Stop market loss, or stop market targets! (Although that one is harder to swallow, due to temptations.)
Not super effective. In the previous flash crash people with stops weren't getting filled in time and were bag holding until the market could take their order. If everyone is selling who's gonna take the other end? In an event like that it's best to not be in it, rather than have a way out of it.
That might work in a mini flash crash. The problem is, however, when there is a MAJOR FLASH CRASH, you'll likely get filled waaaaaay at the bottom and who knows where that might be. The good thing is that most flash crashes have recovered within a short period of time, and a limit order might not be such a bad thing.
I suppose that matters on how lenient your broker is if you are trading with leverage. Like, will their risk management liquidate you instantly when you have passed a threshold, rather than wait for dust to settle, to see where things are at before EOD?
What you're describing is NOT a flash crash but stop running. Basically, all the stops that were placed above or below now need to cover and that creates a massive buying or selling.
During the flash crash, which I've witnessed personally, NOTHING (not even your broker nor their risk management) can get you out of the trade.
During times like flash crash or any black swan event, the only thing to protect risk is a hedged order ie a combined futures+options order. It will have guaranteed limited risk within a hedged position. There is no question of stop loss getting filled here. eg. suppose we want to protect ES long, then we need to create a married put strategy or Cottle's sligshot strategy. This definitely protects against big downside.
Thank you all for the diversity of answers! That's exactly what I was looking for. I'm still waiting to get flamed though. It wouldn't be a first post here without that. I called it a "mini flash crash" but the correct terminology is stop running, as schizo mentioned. Now that I know the term I can search around and learn more. I'm trying to get a sense for how prevalent this is. I guess that only comes with experience. I know I'm pretty much screwed in a real flash crash. I've learned about the circuit breakers. I still need to figure out a plan on what I'd do if I got stuck in a trade that got halted... any thoughts? As a rookie, I'd love some suggestions for reading materials. I picked up a few "day trading" books but they're pretty unsophisticated and don't deal much with the futures market except a few mentions. I'm looking for books with a focus on the futures market.
I use a stop limit with a reasonable worst case limit. The limit will act as a marketable order while dodging mini crashes on individual equities or something like may 2010 or aug 2015. I’ve never sent a market order ever. Always used a marketable limit order, just don’t want to send a blank cheque in how fast markets can move. I don’t want to be that bad tick lol. This is stocks though. Futures like ES appear to be quite liquid and the central exchange makes things more transparent.