Today, 10th September, 2015 Nifty has created a huge gap in the opening trading. Market started almost 84 points down in Nifty index. So its once again a gap trading day. These are the days when intraday traders do the worst gap trading mistakes.
Some gap trading mistakes:
- Buying too early in a down gap.
- Short selling too early in a upside gap.
- Can’t decide target due to the sudden range expansion.
- Can’t decide stop loss due to the sudden range expansion.
- Then see that the market goes exactly against you.
Another problem in opening gaps are the overnight traders become confused if the market goes dead against of them. They either book loss and then finds the market once again comes back to their initial position.
So how to trade gaps in a volatile market?
The key to succsess is identifying correct trend direction, then enter in pullback in the direction of trend and then finally ensure quick profit booking to lock in gains.
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Scott Andrews 12 Reasons To Trade Gaps
- The GURU of gap trading is Scott Andrews, The Gap Guy. He has his famous 12 reasons to trade the gap. They are as follows:
- Gaps have an inherent bias and edge: over 72% of all gaps in the S&P 500 futures market have filled the same day over the past ten years.
- They occur frequently (three to four tradable gaps per week in the S&P) so I am not reliant upon catching that “one big winner” to achieve my monthly goals.
- Gap trading an easy trade to learn and play. No need to “time” the entry – just use a market order at the open.
- I can prepare in about 15 minutes before the market opens each day. No need to scan hundreds of stocks at night.
- I can trade them without charts and from anywhere.
- Getting filled with minimal slippage is not an issue –especially in highly liquid markets like the equity indices and futures markets (S&P 500, NASDAQ 100, etc.).
- The target is pre-defined so I don’t have to manage the trade after placing it (though sometimes I do to maximize profits).
- My risks are controlled and limited to a small percent of my account. No overnight risk.
- Gap trading works in bull and bear markets equally well. I don’t need to predict the market’s next move.
- They occur in most asset classes (equities, futures, currencies, etc.) and can be traded using stock, options, and futures contracts.
- I can grow my account several percent per month on average, and often more with this single, simple setup using just one market. No need to baby-sit lots of different markets waiting for that perfect, entry-sensitive trade to appear.
- Understanding the bias of the market before and after the gap fills, provides a trading edge for the rest of the day while also helping optimize my entries on swing and position trades.
My Gap trading rules
- Don’t trade breakouts. A break our either side can be a fakeout and you can be caught on the wrong side of the market.
- Watch the breakout of first half an hour. The breakout of first half hour can set the mood of the day.
- If the breakout of the first half hour is on the upside never try to short the market till 1:00 PM. Rather try to buy in dips of RSI indicator. Sell in rallies of stochastics or RSI.
- If the breakout of the first half hour is on the downside never try to buy the market till 1:00 PM. Rather try to short in rallies of RSI indicator. Cover in dips of stochastics or RSI.
This till 1 PM trading style is called lunch trick and works almost 80%-90% of times in gap days. Check the image above for more clarification. For any further queries, I will encourage comments below the post.
Indrajit is a professional blogger and trading system developer. Amibroker expert, WordPress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.
Categories: Trading Strategy