How To Manage A Failed Gap Trade
One of my favorite trades is buying the gap down in the market. I've shown many examples of how profitable this trade has been for me over recent months but today I'd like to show how I manage this trade when it doesn't work. Knowing how to manage a losing trade is critical if you are to profit from this pattern in the long run.
Today the indices gapped down so I was a buyer a few minutes after the open. One of my rules for this pattern is if I am not showing a profit by around 10:15, I will exit the trade and that is exactly what I did today. As you can see I took a very small loss on this trade.
I think today was a great example of how to recognize when a trade isn't working and when to get out. Study the above chart well. Being able to recognize a failed pattern as early as possible is something we all should try to get good at because it can make a huge difference in our P/L over the course of our career as a trader.
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5 comments:
Kevin,
My observation on fading the gap is about 60% accuracy. It has better chance if yestersday fade did not happen.
For yestersday, I purchased the ER2 1 minute on opening and sell at 2 minutes later when the momentum of the fade is not there for 0.7 point profit. If I had waited I would have lost money.
From your experience, is there any indicator that will help you to know the strength of the rebound ?
Fading in the direction of the daily trend seems to work better...although it didn't work today.
Kevin,
Are you using mechanical stops during scalps like morning gap fading, or on your daytrades, swing trades... Do you always use same percentage stop loss? Please explain...
Thank you
Julia
On the gap fade trade I use a time stop which is about 45 minutes.
Swing trades I usually use a stop that is a percentage of the 10 ATR (average true range).
Kevin,
What % of 10 ATR do you usually use or how do you determine the % for each trade?
Perhaps you can consider a post on this on its own if time permits. Thks
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