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GAP OPENING TACTIC
In cases
where the markets are set to open up strongly, there will often be large gaps in
the opening prices of certain stocks from the prior day's closing prices. This
can provide profitable opportunities for day traders. The following sets out an
easy to implement strategy or tactic that may be used to capitalize on these
opportunities.
Suppose
that, prior to the opening bell, indications are that the market will open up
quite strongly. A large amount of buy orders for many stocks that have been
placed prior to the market open will cause market makers to increase the price
of such stocks at the commencement of trading. In many cases, the amount which
the market maker opens or "gaps" up a particular stock will be higher than what
is justified. This creates what is often referred to as a "Bull Trap".
In other
words, the stock is sometimes opened up excessively high to entice investors to
buy simply because the stock shows strength at the open. The setting up of a
Bull Trap is the main reason why many stocks that gap up at the open tend to
retreat back in price after the first hour or so of trading. Once the pre-market
open buy orders have all been filled, the demand for these stocks often
subsides.
There are
exceptions, however, and these are what create some potentially profitable day
trading opportunities. In particular, chances are good that if a stock thathas
opened up is able to reach a new daily high after the first hour of trading, the
strength shown at the open was real and not artificial because there has been
additional and continued buying after the pre-market orders have been filled.
This provides day traders the opportunity to use the following tactic or
strategy:
1. Choose
a Stock
Choose a stock that has opened by at least Re. 1.00 over the prior day's closing
price.
2. Allow Trading for One Hour
Permit the stock to trade for the first hour after the market opens and monitor
it closely.
3. Set the Alert
After the first hour, set an alert 1/4 point above the high of the day
If the stock in fact moves to a new daily high, the alert will be triggered and
you should then immediately buy and, at the same time, place a stop loss sell
order below days low.
Summary
This
tactic or strategy provides day traders with a fair degree of profit potential.
There is also limited down side risk because of the protective stop loss sell
order.
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