Ways to differ 'good' gapping shares from bad ones?

[clylbw]

Hi,

As you may have all been aware, some US shares tend to gap up or down pre and during the beginning of trading, especially those in the news.

However, it seems to me that there are 'good' and 'bad' gapping shares. The 'good' ones jump in the beginning, and keep upping until towards the end of the session, an example being today's MBT.

'Good' gapping stock like the above is what I have been looking for. But there seems to be another group of gapping stocks, the 'bad' ones. These gap up or down at the opening, and then just stay there for the rest of the session, as today's SFFB showed.

Since some of my best trades are from 'good' gapping shares and some of my worst ones from the second group, I wonder whether there are some ways to tell them apart. Market scanners do not seem to work in this aspect...

Thanks a lot indeed.

 

[clylbw]

For today's MBT.

 

[clylbw]

Today's SFFB.

 

[Grey1]

Gappers are pure gamble.. some times it pays off most times it does not..

Why are they gamble ? Simple you have no time to asses the risk of the trade and a trade without risk analysis is only a Gamble..

saying that ... what a joy to win a gap trade ? We all have that gambeling Gene inside us other wise we would not be a player in the first place..

Awaiting to hear the reasoning of other traders on gappers...

 

[snip]

clylbw

What market scanner do you use to find a gapping stock.? Is there a web site I can use to find these stocks in the first 20 mins of the open.?

Cheers Snip

 

[mmillar]

If you use Level 2 on Nasdaq then you will have a much better idea of what is going on 'behind the scenes' and be able to make a much better determination if the gap is going to close. This is one of Naz's strategies.

 

[Trader333]

clylbw,

Are you talking about those stocks that gap up only because stocks also gap down ?

I would ask myself why do some stocks gap up at all ? and the answer is either some news has come out that is very positive and so there is some pre-market buying in anticipation that the stock will continue trading higher. The second reason is that a number of traders "believe" for some reason that a stock is going to move up during the day.

But as Grey1 says it is a pure gamble that the amount gapped up by represents under value, fair value or over value. Pre-market trading is nothing like as liquid as when the markets open so what you are trying to assess is whether those trading pre-market have correctly assessed the potential value of a stock or not. This means you are effectively assessing someone else's opinion and we know that they are as often wrong as they are right.


Paul

 

[mma]

No way to predict what is a * good * gap or what is * bad * , like the man said , it's a gamble .

 

[FTSE Beater]

Hiya Clylbw

I hope your keeping well.

I look at the previous days trading for the gapping stock. SFFB's previous trading was very sketchy, and trading about 20k volume which is poor for a US Stock.
MBT on the other hand traded well the previous day and had a volume of 340k

As for buying or selling as soon as the price opens, yes that is a gamble, but if you are prepared to wait for a solid set-up then you should be ok.

HTH

<hr>
Hi Snip

Try CBSMarketwatch or Lycos

HTH

 

[Newtron Bomb]

Hiya clylbw

I think what you would prefer to trade are the stocks which trend after it has gapped.

This would be mbt as it is clearly trending and there a setups which you can look for to capture these types of trades but you will have to wait for the set up to indicate that this stock may be prepared to trend.

Compare this to your second chart sffb which after its gap and the first bar has completed was range bound and these are the stock you have said you are looking to avoid.

Look at the differences between the two stock charts as they are very different.
Grey1 has enlightened us with some set ups on another thread called low risk entries

gapping us stocks are higher risk but can be traded with success if you wait for a few moments to see if a setup present itself.

HTH

NB

 

[NasdaqTrader]

Hi, I am new to T2W but thought I would add my thoughts regarding gaps. I have been trading the Nasdaq for 3 1/2 years and find that gaps can be played profitably and without it being a gamble. You need to have a strategy with clearly defined setups though.

Not all gaps are tradable and that it what leads to gambling imho. However there are some very reliable setups that do offer consistent results. Gaps are often caused by news on a stock etc or economic news etc. The first thing to consider is whether the whole market is going to gap open (by using futures, qqq etc). The second element is to determine where the gap is in relation to the daily chart of the stock. For example, if a stock is in a downtrend on the daily chart and has bounced up for the last 3 to 5 days to a resistance point, then it gaps up the following day it is a good candidate to short.

Most gaps do fill. However only use stocks with good volume. Market Makers often exagerate gaps as it is easy to do in pre market trading which is not very liquid. More often than not they will gap up a stock because they need to sell, not to buy. So the key is to determine what the Market Makers are likely to do when the stock opens.

I try and determine whether the gap is likely to fill and if it is then I use an entry based on the first 2 or 5 mins after the open. If it breaks the low established during the first 2 minutes then I enter short with a stop above the high of the first 2 minutes of trading and a target to fill the gap. I will only enter if the risk reward is above 2:1 based on the first 2 mins of trading.

Trading gaps is a very extensive subject. I have a detailed trading plan that I have developed for myself which outlines the exact strategies I use, where my stop loss will be, what the profit objective will be etc. If anyone would like a copy let me know, I will gladly email it. I hope this will help and stimulate some further discussion.

Regards

 

[Glenn]

Here's a link to some Gap Trading strategies.

www.stockcharts.com/education/TradingStrategies/gapStrategies1.html

Glenn

 

[Grey1]

Amateurs control the OPEN , Professionals control the CLOSE..

Any 1 heard of the above old axiom ?
Trading the close is far easier as the pattern is more predictable..


While I am on the subject of CLOSE:--

Any 1 heard of HOOK CLOSE ?

After a down day the professional buy into close. The buying by professionals will rally stocks into the close and create what is known amongst the community as a HOOK CLOSE.. The end of the hook ( Tail ) is the result of program traders dumping their large position in smaller blocks resulting in a tail look alike pattern ..

This nice and neat strategy is well known and very predictable..

Keep your eyes on stocks at around 8.20 UK time on a good down day .. HOOK strategy is a nice and profitable pattern which does not need much interpretation...// You can come out profitable by only trading this strategy on a bad day ....

 

[Newtron Bomb]

grey1
Very interesting ive noticed this in futures 10/15 mins before a close you would get a rally on a down day.

What would you call a bad day?

NB

 

[clylbw]

Hi,

thanks a lot to all of you. You have been so helpful.

 

[Grey1]

Netwon,

By a bad day I mean DOW at around 80 or more points down. An even better indicator would be ADVANED/DECLINE figure with 3/4 in decline...

 

[Newtron Bomb]

grey1
thanks for you reply

NB

 

[Naz]

Hi, I am new to T2W but thought I would add my thoughts regarding gaps. I have been trading the Nasdaq for 3 1/2 years and find that gaps can be played profitably and without it being a gamble. You need to have a strategy with clearly defined setups though.

A voice of common sense.I notice that you've traded the Nasdaq for a number of years,perhaps this is the reason.I also enjoyed the post it was nice to have someone new to the board contributing some interesting points.

I've traded Nasdaq gaps for a number of years.I use level 2 direct access.If you have a stratergy and a defined set up,you need the best tools for the job in order to carry out that task.

Good luck.

Naz

 

[NasdaqTrader]

Thanks for the post Naz and the great site. A few more of my thoughts about gaps ....

I think a lot of traders get into problems trading the open because they think they HAVE to trade the open everyday. The setup at the open is not always tradable in my experience. So if you are just putting on trades in the hope that they will work then that is pure gambling, as Grey1 mentioned and I agree with him.

However there are times when the market gaps where the odds favour the gap filling. These are the days when trading the gaps at the open are very profitable. Part of the key is determining where in the overall trend of the market the gap is occuring. For example, if the market has been up for 5 days in a row and then gaps up on the 6th day, into a prior resistance area, then the chances that the gap will fill at the open are very good. (This is a very simplistic explanation). Thus I would look to short at the open.

But I need to know what my risk will be and what the reward will be to ensure that the trade will fit into the parameters of my overall trading plan. This is acomplished in different ways but again I will give one simple example.

Suppose I am going to short the QQQ based on the setup described above. Lets say the previous day's close was $30.00. So I would make my target $30.05 ie I will exit the trade just before it completely fills the gap. I look at the gap just before the open and see it is 30c for example. So I know before the market opens that my target will be in the region of 25c. I now need to know where my stop will be but cannot do that before the market opens. I do know that I want a stop to be less than 12c so that the risk reward for the trade will be at least 2:1.

So I watch at the open. There are several ways you could enter the trade. One would be let it trade for the first 2 minutes. Then you have a high and a low made in the first 2 minutes. Then if it trades below the low of the first 2 minutes, enter short with a stop just above the high of the first 2 minutes. However, if the stop is more than 12c, then just pass on the trade because you know that the risk reward will be less than 2:1. If the stop is less than 12c then enter. Then just let the trade play out.

So using the above very simplistic example, you can trade the open without gambling and knowing you risk to reward for every trade. It happens fast at the open so it requires some practice but if I am able to do it then anyone can !! I watch 4 stocks on separate charts at the open and have predefined entry strategies for each one. Then if the strategy hits, I enter. That way I don't have to do much thinking or decision making at the open. And for me the less thinking the better !!!

Hope this will prove useful.

Regards

 

[Grey1]

Nasdaq Trader ,

Thank you for the post..


IMHO

What makes a trader to be and remain a trader is to be able to sit back and analyse the riskof entering in to business with market at all times..

To be able to calculate the risk one needs to have a price bench mark based on the SAMES day's info + time to asses the risk ..

At open we have none of above..

Open is very irrational and as a result there are many SEXED-UP opportunities which it could pay off handsomely or it could go against you ..

I have made a lot of money at open in my earlier days of trading and lost even more but this is me..

I however feel if you have got yourself a strategy which works well then KEEP it and donot let others to influence you ..