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Strategy II: Gaps
Gap trading strategies, the favorites of seasoned day traders, are among the most profitable and reliable of tactics, even though Gap trading opportunities are rare. Experienced day traders are always on the lookout for Gap opportunities. Right after the opening bell, they start examining all stocks they can think of, hoping to come across a Gap signal by chance, and then, promptly jump into it to make a kill. Alas, they may not find such lucrative opportunities very often. But now, the good news is that Tradetrek Gold Service subscribers can easily capture such trading opportunities! Tradetrek.com computers are constantly, systematically searching the entire market for Gap trading opportunities. The instant that we detect one, we post them automatically in the "Day Trading Center," as fast as state-of-the-art intelligence is able (= fast!!) The following charts show a typical Gap-Up-Then-Drop-Back sell signal and a Gap-Down-Then-Come-Back buy signal.
Figure 3. CNS opens at 15, higher than yesterday's high of 14.95. Then it drops back to a level lower than yesterday's high, signaling a likely bearish turn. The strategy is to short the stock near 14.93 with a cut loss cover at 15.42, a level slightly higher than today's high of 15.38.
Gap-Up-Then-Drop-Back sell signal: Sometimes, because of market reaction to industry news, earning surprises, floor rumors, etc.) a stock price gaps up and opens higher than yesterday's intra-day high, but soon it drops back to lower than yesterday's high. This kind of gap-up move at market open is occasioned by solid economic influence, so the stock price does not collapse back. In other instances, though, the jump may be sparked by a small group's over-reaction, after which the price cannot hold ground at such a level, so that it quickly falls. The Gap-Up-Then-Drop-Back trading strategy is to short sell the stock when it drops back lower than yesterday's high. Usually the price will continue to quickly drop much further, at which point the trader soon makes a profit. The psychology behind this effective strategy is simple: when it's confirmed that even a good story can't drive the price up, investors should give up on the stock and buy other more promising stocks. Therefore, not only will existing holders of the stock sell it: new buyers will be reluctant to touch it. Hence, the price will soon collapse.
Figure 4. JPM opens at 50.28, lower than yesterday's low of 51.06. Then it comes back to a level higher than yesterday's low, signaling a likely bullish turn. The strategy is to buy the stock near 51.16 with a cut loss at 50.12, a level slightly lower than today's low of 50.07.
Gap-Down-Then-Come-Back buy signal: because of market reaction to negative signals-- bad news, earning surprises, industry rumors, etc.) the stock price gaps down and opens lower than yesterday's intra-day low, but soon it comes back higher than yesterday's low. Often times the gap-down move at market open may be triggered by reliable economic indicators, so the stock price won't come back. But when the jump is caused by a small group's over-reaction to unreliable news (often the case), the price may quickly recover. The Gap-Down-Then-Come-Back trading strategy is to buy the stock when it comes back higher than yesterday's low. Usually the price will continue to quickly rise much further; then, the smart trader will soon make a profit. The psychology behind this well-used strategy is simple: when it becomes clear that even a bad story can't keep the price down, investors gain even more confidence in the stock. Therefore, not only the existing holders of the stock hold on to it, but many new buyers are attracted as well, soon causing the price to rise.
For both gap trading strategies, we provide "the optimal entry and cut-loss levels" for the traders reference. These levels are derived from extensive historical back-test data, such that the traders who follow those rules would achieve optimal returns with minimum risks. But as we noted above for the Breakout chart, it is impossible to calculate an optimal profit target that suits all traders, so we do not provide one. Nonetheless, as suggested above, there are a few things that day traders can do: One useful reference is the average daily price range. In a single trading day, traders should not expect a profit much bigger than the size of the average daily price range. Following a Gap-Down-Then-Come-Back, if the trade is already making a profit comparable to the average daily price range, it is time to unwind the trade. Traders can also choose to successively raise the stop loss level if the trade makes more and more money. In this way, they protect profits and keep the opportunities open for more gains.
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