Monday, March 19, 2007

Managing The Gap Trade



One of the trades that I like to do is the Fade The Gap trade which I've been writing about for weeks. Today the trade didn't work out so I'd like to take this opportunity to show you how I was able to break even on the trade and not lose money even though the trade failed.

This morning a few minutes after the open I shorted the Q's because of the gap up above the previous day's high. The Q's sold off but I didn't take it because I was looking for the NASDAQ to go negative which it never did. My golden rule for this trade is that after 10:00, if I'm not making money on the trade get out. So around 10:15 I lowered my stop to break even and I got stopped out.

So here is a wonderful example of a trade not working out, yet I didn't lose money. When this trade works I usually do very well. The only time I get my head taken off is when I short the Q's and the NASDAQ keeps going higher right from the open eventually hitting my stop which is about .50 higher depending on the current volatility. This only happens to me about .20% of the time. I usually make a profit about 50% of the time and break even on 30% of my trades. Overall it's a nice little short term trade.

4 comments:

John said...

The red dotted line is close to Friday's close. Were you expecting it to close today below that level or were you expecting the gap to fade to that level which basically would have been a profit of 30c?

John said...

Also, the MACD is now close to zero. Do you therefore still bearish on the Q's and hence is shorting still a good trade?

Kevin said...

Yes, the red dotted line represents the close from friday where I was looking for the Nasdaq to sell off to.

I wasn't expecting it to close below that level. This is a short term trade...you take the money and run. Sometimes I'll use this method for a longer term trade, but not today.

I'm still playing from the short side. Anything can happen with the Fed meeting this week so be careful.

chiu said...

Kelvin,

How much is the gap is considered valid ? Could you share your opinion for SPX, Dow and RUT as well ?

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