OVERNIGHT GAP SELECTION I : Trading Article by Daryl Guppy

The strategy for this trade was discussed last week. The objective is to capture the momentum of an excited crowd and trade its continuation overnight and into the next day. The strategy recognizes that it is unlikely that we will identify a gap trade before it happens. It is also unlikely that we will be able to buy stock at the opening gap price. Instead the trader waits for gap confirmation, then buys the stock. The intention is to sell on the next day. We expect other traders to be attracted to this gap trade when they see the gap on the end of day download. This includes traders who already own the stock, and traders who are searching for gap, or price volume breakouts.

The objective is to sell on the next day when we consider that the buying pressure is declining. Enthusiasm may carry prices higher next day but unless this is part of an extreme momentum trade, the most likely result is that prices will peak during the second day and then decline.



The strategy does not call for an exit at the top of the second day, although at times the exit may occur near this level. The strategy recognizes that it is more likely that we will capture prices as they fall back from the peak of the day. The potential returns range between 5% and 20% or more. Returns are lower when trading stocks, but higher when trading warrants and other derivatives. The objective is to take a low risk overnight trade and collect a quick profit.

For success the strategy requires access to live data and live trading screens. It also calls for good stop loss execution. This is best achieved using automatic electronic stop loss conditions and where necessary, contingent orders. The technology is available, and it helps make these strategies more successful.

SELECTION

Opportunity screening starts with the WebIress market heat screen. The scan does not start until 30 minutes after the open of trading. This gives time for every stock to have traded, and allows us to find all those stocks which have gapped on the open. These show up as bright green patches because the opening gap creates a higher percentage gain. The search compares the close of yesterday with the open of today. Not all of these candidates will meet our requirements of a gap between the high of yesterday and the open of today.



The gaps identified in this screen range from 1.53% to 50%. The MOL gap in this example is 35.88%. Our interest is in gaps greater than 3%. The screening process starts by eliminating stocks that do not meet our gap requirements. There is no easy way to do this. We start by making a full list of stocks that have gapped up. We immediately eliminate any below 3%.

Watch out for Part II...

To read more articles and commentaries from Daryl Guppy, click HERE

***

Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.