OVERNIGHT GAP TRADE MANAGEMENT II by Daryl Guppy

Continued from Part 1...

DAY 2 EXIT

This is a two day trading strategy. Day two is about profits. There is no intention to extend this trade into a third day. Prior to the open our focus is on the order lines. We look for evidence that buying pressure is continuing. There are two ways to determine this.



The first uses the estimated match price. This is set at $0.61 and represents a gap above the previous day’s close. It is not a real gap above yesterday’s high, but it does suggest that the upwards move is likely to continue.

The second considers the balance between buyers and sellers. These figures take into account all the orders in the order line. This includes some very old buy orders which have little chance of execution at $0.42 and lower. However, the balance is tilted very heavily towards buyers with 1,581,150 of buying volume. This includes an undisclosed buyer sitting at $0.57. It is unlikely that prices will fall to this level, but the presence of this large buy order provides additional support for continued momentum during the day. If this buyer is really that interested in PEM then he may well decide to chase prices higher.

If the undisclosed order was on the sell side it sends a bearish signal. The sell orders total 625,625. The line is shorter than the buy line and confirms continued bullish pressure on prices.
Prior to the open we lift the stop loss to the same level as yesterday’s close. At worst, if triggered, this will lock in a 3.45% return.

Exit management calls for close monitoring of intra-day price activity. Early in the morning prices test $0.63 as a support level. Our stop loss is lifted to $0.63, locking in a potential 8.62% return.

During the day prices hit $0.66 on low volume, and then pull back from this level. In the late afternoon sellers flood the market with orders at $0.65 and $0.64. This suggests that the momentum generated by the gap on the previous day is losing strength. Our objective is to do the best we can on the day, and in the face of this selling pressure we meet the bid at $0.64. This exit locks in a 10.34% return. A few trades later, prices drop to $0.63 which would have triggered our stop loss exit.



Prices do climb back to $0.66, but they close on just a handful of trades. The volume traded is not enough to close our position.

These trades return significant short term gains. They are more effective that day trading strategies which rely on buying near the low of the day and selling near the high of the day.

These gap trades reduce overnight risk because they rely on a continuation of demonstrated momentum. When traded with the advantage of price leverage these trades can return 5% to 15% on a 36 hours trade. The strategy is straightforward but the execution calls for well developed trading discipline.

> Related Articles:
OVERNIGHT GAP TRADE MANAGEMENT I
OVERNIGHT GAP SELECTION Part 1 and Part 2

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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.