how to avoid the dreaded gap downs

Sidekicker

Well-known member
407 11
What are some strategies for avoiding the dreaded gap down or gap ups when trading stocks.
In the very liquid stocks, this doesn't happen so much, the big caps but still occasionally it can mess up all your calculated risk on stop losses.
Paying for guranteed stops isn't really worth it either os interested to see what people use.
 
M

member275544

0 0
What are some strategies for avoiding the dreaded gap down or gap ups when trading stocks.
In the very liquid stocks, this doesn't happen so much, the big caps but still occasionally it can mess up all your calculated risk on stop losses.
Paying for guranteed stops isn't really worth it either os interested to see what people use.

I haven't come across that too much, I generally find gaps in the direction of the trend, so if anything I'm generally on the right side. Cant say there is really a strategy, as you never know what might happen. overnight markets help, but by then you cant adjust your order
 

tomorton

Legendary member
8,420 1,344
Exceptional moves against you are a pain but you can also expose your positions up to the exceptional moves that go with your trade direction. Use elastic limit orders.

Overnight, if you leave the positon open with a stop and limit order, push the limit order way out beyond your usual R:R. If you usually set orders at R:R of 1:2, push the limit order out overnight to give 1:5. Price will occasionally be hit at this level, sometimes price goes out to 3 or 4 x Risk, but at least it doesn't close automatically, leaving you the chance to re-set or close manually. Pull it back again when the session is under way. Also effective when the gap open is in your trade direction but so high that it now squeezes your profit headroom so that you would otherwise have effectively only got 1:1.
 

Sidekicker

Well-known member
407 11
I haven't come across that too much, I generally find gaps in the direction of the trend, so if anything I'm generally on the right side. Cant say there is really a strategy, as you never know what might happen. overnight markets help, but by then you cant adjust your order

Check out Aggreko AGK in the last few days.
A drop like that could wipe out a large part of your account.
 

Never1

Newbie
4 0
If I was long a stock and the stock was set to gap down, I would probably adjust my stop limit a bit wider in premarket, and wait for the gap to fill or partially fill before I exited. It really depends on where I am at in terms of profit or loss. If it was a stock that I had booked some nice gains on, until that dreaded gap down I may just let my stop get hit and take what profits I have and count my blessings.

I use Average True Range to set my stop areas. Usually 1.5 - 2 X the ATR on the daily, to have some wiggle room for swing trades.

Most gaps tend to fill at some point, so depending on the stock's particular behavior (and what news caused the gap down) I may ride it out and wait for it to fill before I exit a trade. It really depends on the stock. some good quality ones have very wide stop loss areas, around 10%, so I can ride the waves and collect the dividends and only get stopped out on a major breakdown.

The gap ups and downs on order entry/setups are what drive me nuts. Looking for ascending/descending triangles and double tops/bottoms and setting orders up to fill on breakouts/breadowns and then having the damn stock gap past my limit order is annoying as hell, but there's not much you can do except wait for the move to retest the previous resistance/support areas and then enter the trade.
 
M

member275544

0 0
Check out Aggreko AGK in the last few days.
A drop like that could wipe out a large part of your account.

I agree Sidekicker. However in this one example there were quite a few warning points much earlier. This is obviously is just this one example, your point is still a valid one of course.
The attachment shows the early warning from the H&S to the two gap downs, before filling both and then 7 straight days down. You would have been a brave man to be doubting those 3 indications that the market was telling you something
 

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  • AGK.jpg
    AGK.jpg
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Splitlink

Legendary member
10,850 1,234
I haven't come across that too much, I generally find gaps in the direction of the trend, so if anything I'm generally on the right side. Cant say there is really a strategy, as you never know what might happen. overnight markets help, but by then you cant adjust your order

Sometimes, overnight company managerial decisions are deadly for traders.

On instance, that I am thinking of, is Daily Mail Trust, involving a sudden decision on whether to hold, or sell, a free press newspaper that it had. Big money is not worried about these matters--only share traders, but I do not think that there is any way that this can be avoided.
 

neil

Legendary member
5,167 749
What are some strategies for avoiding the dreaded gap down or gap ups when trading stocks.
In the very liquid stocks, this doesn't happen so much, the big caps but still occasionally it can mess up all your calculated risk on stop losses.
Paying for guranteed stops isn't really worth it either os interested to see what people use.

If you dread gap downs then either use more liquid stocks and/or use guaranteed stops in case you fall victim to that rare? Black Swan event, which is the event that kills your profit form all your past trades. It's worth it to insure against the one event that could kill your profits. And it does happen to people. It's just the when and whether it will happen to you that makes insurance worthwhile. I,m talking of spread betting thus not sure if guaranties are available for futures and equities?:?:
 

Sidekicker

Well-known member
407 11
If you dread gap downs then either use more liquid stocks and/or use guaranteed stops in case you fall victim to that rare? Black Swan event, which is the event that kills your profit form all your past trades. It's worth it to insure against the one event that could kill your profits. And it does happen to people. It's just the when and whether it will happen to you that makes insurance worthwhile. I,m talking of spread betting thus not sure if guaranties are available for futures and equities?:?:

I'm wondering if bigger market cap might help...although to be fair Aggrekko is £4b market cap.
The question really probably comes down to how often gaos occur in the stock, a measure of the ATR, the market cap, and then whether it is worth it to pay insurance in the form of a guaranteed stop.

Edit: just looking at it, don't think guaranteed stop would help at all:
Please note: the use of a Guaranteed Stop Order will only protect against slippage on the closure of a trade, it is still possible for slippage to be applied to the opening level of a Stop Order to Open.

Any option is about the only thing that would.
 

barjon

Legendary member
10,705 1,809
Just something you have to live with in my view.

I generally take stops off overnight (been caught out by the opening hurly burly too often) and replace them when things have settled down after the open next day. If I'm heavily committed on one side or the other I'll take a pro-rata hedge on ftse futures overnight.
 

Tradesight

Newbie
0 3
Just something you have to live with in my view.

I generally take stops off overnight (been caught out by the opening hurly burly too often) and replace them when things have settled down after the open next day. If I'm heavily committed on one side or the other I'll take a pro-rata hedge on ftse futures overnight.

I agree with the above and don't use overnight stops for straight equities. It's usually better to manage them yourself in the next regular session. This is because the majority of stocks are too ill-liquid to trade after hours and the less liquid stocks cost the most to hedge. One really has to make sure that you don't get too concentrated in any one position because unfavorable gaps will happen.

I subscribe to the notion that most gaps fill in the same day anyway. The thing that separates the ones that fill in the same day vs. not is the size of the gap. Smaller gaps tend to fill and larger ones have enough to power to stay open longer. Technically speaking, using the floor trader's pivot series, if a stock only gaps to R1/S1 it has a good chance to fill the same day and the same is true for R2/S2. If the same stock gaps beyond R3/S3 then it's technically a large gap and likely won't fill the same session. When I'm on the wrong side of a gap and it's beyond R3/S3 I'm generally reducing exposure quickly. And, when I have the good fortune to be on the winning side of a technically large gap I put on my "pig nose" and let it ride with a stop above/below the day's low.

There are other ways to objectively and technically determine if a gap is large large enough not to fill in the same day but most traders can calculate the pivot series and it's a good starting point.

Note that his method is only for non-leveraged positions. I use hard stops for all forex, index futures and commodities. Never let your margin clerk make you take a loss that you should have taken yourself yesterday.

Rich
 
Stocks under 10

Commodity markets have a tremendous impact on the economy and the life of people. Though demand-supply is the prime factor behind the price volatility, currency moves, geopolitical issues, economic growth and government policies are other factors influencing commodity prices.
 
 
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