As I explain in the video, I like the “concept” of stop-loss orders, but in “practice” they are very dangerous. The basic problem with “stop loss” orders is that they don’t necessarily stop your loss. In fact, they can do the opposite: Create a loss when holding on would have resulted in a gain.

This is a particular danger in international ETFs because they are prone to big “gaps” when U.S. trading opens. Prices here adjust instantly to reflect news and events in other time zones. These opening gaps often reverse themselves very quickly – but meanwhile, your stop-loss order may have been triggered. And once it’s triggered, it becomes a “market order” which is also dangerous.

Here’s a hypothetical answer that may help. Suppose you buy an Asia-focused ETF for $25 a share. You want to limit your loss to 10%, so you place a stop at $22.50. This means that if your broker’s computer sees this ETF trade at $22.50 or below, it will immediately sell your shares at the market price. And by “immediately” I mean within a second or two. Machines don’t stop to think. They just do what they are told.

Now, your ETF wanders up and down a bit for a few days and then closes on Friday at $24.10. You have a small open loss but you want to be patient. Fine. Then on Monday (which is still Sunday to us here), the Chinese government releases some statistics that don’t seem good for the stocks in your ETF. U.S. markets are still closed so nothing happens to your position – yet. But nervous investors spend Sunday night entering sell orders online.

At 9:30 Monday morning, all those sell orders hit the tape at once. Your ETF trades some shares down at $22.10. A microsecond later, your stop order becomes a market order and you get sold out immediately. Perhaps your order will be executed at $22.10 or perhaps at an even lower price. Then, once the nervous nellies are out, the ETF zooms back up to $23. A few days later it is at $27 as more news comes out.

So what did the stop loss accomplish? You lost even more than the 10% you were willing to take, and the opportunity cost was even higher. Instead of an 8% open gain, you have an 11.6% realized loss.

Now of course, if our example ETF had continued down to $20 and stayed there, getting out at $22.10 was a lot better. My experience is that it rarely happens that way.