PinPoint Profits - .NET Framework

The Official Advocate for Personal Investing Originally published JANUARY 2012. SFO magazine.

Pinpoint Profits

With Gaps

A stock that gaps in pre-market action can be a hint of potentially greater price movement throughout the trading day and sometimes results in some of the biggest percentage movers on the exchange at the final bell.

By Troy Peterson

A stock typically gaps because of a news release that traders are responding to in a negative or positive way.

The only indicator I use in day trading gaps is prior price action.

Prior price action tells me where other traders and investors may be trapped in a negative position. The most important aspect of trading is being able to predict what others may be thinking about their positions. Traders gain an edge by knowing prior price action.

If a stock gaps down under prior price action, this could be a hint of lower prices to come. The gap down below prior price action creates a shock and places prior longs in pain and panic. The pain is created from a negative balance that has just occurred in their account. The stock is overtaken with a fresh supply of selling, allowing traders to capitalize on the short side.

Shorting a bearish gap

You do not have to be the first trader in the gap down at the open to make money. I actually think it's just the opposite. Let the stock trade the first 15-30 minutes and let it show you if it

wants to make new lows. For example, in the video, Vertex Pharmaceuticals (VRTX) opened at 44.00, gapped down just .44 from the previous close and then proceeded to trade for the first 15 minutes to a low of 41.45. The difference has given you an expanded trading range of 2.55, a day trader's profit haven.

THE ENTRY

The entry is the retracement of at least 38% to 50% of the prior move. Watch for price confirmation for entry to go short. VRTX retraced 50% in 45 minutes to 42.77 and created a double top on the one-minute chart confirming an entry to go short at 42.70. A stop is placed over 43.00 (a whole number to give the trade some wiggle room).

THE EXIT

VRTX has an expanded trading range of 2.55 and a retracement of 50% of that range for entry. The target is going to be about half the range of 2.55, or 1.275, which is low of the day at 41.45.

I teach traders to take 50% profits at the low of the day and tighten up the trailing stop on the second half of the position to a prior pivot high from

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the KEY to shorting a

bearish gap

DOWN

is your entry.

the five-minute chart. That would come in around 42.07 -- a hard trailing stop already in the money.

VRTX does proceed to take out the low of the day and trades lower into 40.11. Traders already booked partial profits at the prior low of the day at 41.45 and now are trailing the second half of the position to see what the market offers. VRTX trades to 40.08, which is close enough to a whole number that I would advise taking another quarter of position off and trailing the final quarter to a prior fiveminute pivot high at 40.85. The 40.85 does trigger the position out with a hard stop in the money.

THE TAKEAWAY

A stock that gaps and traps other traders from prior price action can provide good trading opportunities, because they provide expanded volume, expanded ranges and trending action.

Troy Peterson is the CEO and founder of Gap Edge Trading.

Gaps Create

Opportunity

? Gapping stocks tend to experience unusually high trading volume.

? Institutional buying/selling interest can drive a stock for the entire day.

? New highs or new lows are typically made when a stock posts a gap, providing day traders with expanded trading ranges.

? Gapping stocks typically see tight trends intraday and are often good candidates for trend continuation plays.

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Copyright 2012 by Wasendorf & Associates Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form by any means, electronic or mechanical including posting to another website, photocopying, recording or by any informative storage and retrieval system without the written permission of Wasendorf & Associates Inc.'s President.

This article is strictly the opinion and conjecture of its writers and is intended solely for informative and educational purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. This article is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Information is obtained from sources believed to be reliable, but is in no way guaranteed. Further, there is no guarantee of any kind that is implied or possible where projections of future conditions are attempted. The publisher is not liable for typographical errors.

Commodity futures, securities, options and forex trading involve risk and are not suitable investments for everyone. Any investment should be carefully considered in light of an investor's personal financial objectives and risk tolerance.

The article contained herein may provide hypothetical or simulated performance results. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have over- or undercompensated for the impact, if any, of certain market factors such as the lack of liquidity. Simulated trading programs are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Further, past performance does not guarantee future results.

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