Reason behind the jump

[aryan.]

Can someone please tell me why does the price of a stock jump up or down like the pattern shown below.

What is happening here, does the price jump up because lots of traders were buying the stock during after market hours.

Or is this some sort of problem with my data ( i download eod prices using getbhavcopy)

 

[d_s_ramesh]

There is possibilities for this to come in those stock which have low volume or lesser liquidity. When there is a sudden derth of buy orders and an open market sell order is in the exchange system. That order will get executed and it forms this price gaps. This happens in some big stocks too.

As exchange permits 20% move on both sides for each stock, taking this option as advatage, many traders sit to do this work. These type of orders are placed by traders who are desparate to sell their holding in fear of not losing more or may have punched wrong orders and by the time they discover their mistake and rectify it, the waiting stealers grab the opportunity.

Our exchange does not have the mechanism to handle huge surge in volume at opening and closing times. This makes it difficult to remove wrong orders immediatly. We can find these price gaps mostly in the opening.

If everyone are courteous enough to see that they do their business in a legal way. It will in turn benefit themselves greatly. Money which is earned in an un-righteous way finds its way out in the same manner, not only in the volume as it comes, it even takes with it some more. That is the price paid for stealing.

So, these price gaps are regular traded prices.

 

[aryan.]

Thanks d_s_ramesh for the explanation.

Is it safe to say that we can ignore such candles for technical analysis??

 

[d_s_ramesh]

It's closing prices that is more important in technicals. Most of the indicators work with closing prices. But, still for stop loss calculations these high/lows take prominence. These type of price moves will increase risk on future trades for some time till the indicators wade out sudden shocks like these.

In those stocks that have low liquidity, it would be advisable to take long term view, like weekly charts. That will neutralize all these unwanted moves and also give big returns.

We are always inclined to short term gains and satisfy ourself with small profits while on the losing side we wait and loose big time. Instead if we reverse this by waiting more with winning trades and closing off losers on first weakness. It would be a long journey, a happy one of course.

Those who have made it big time in stock markets like Warren Buffet, George Soros or Peter Lynch all had long term views. Warren Buffet still holds his position in Coca Cola, which he entered few decades ago.

Have a long term view, make it big. 'When it rains gold take a bucket, not a thimble.' -Warren Buffet.