It is more of a tape-reading exercise that takes advantage of a temporary disbalance during market opening.
I wait for a day which is expected to gap-down or gap-up sharply. Every 4th or 5th day does gap sharply nowadays.
I trade only in those stocks which are on my "market watch" or very liquid stocks.
As I watch these stocks everyday, I know what is an abnormally sharp move or an abnormal volume for such stocks.
If I try to trade a stock that I don't know much about, I won't be able to tell if the order flow is normal or abnormal.
e.g. take the case of ICICI. I watch it daily and I know that 3000-5000 share orders are normal for this stock. However, if I start seeing 15000-20000 share orders, I know that there is abnormal trading going on in this stock.
For something like Dish TV, 20000+ shares orders are above normal.
I am talking about single orders and not the demand at a single price level.
====================================
I avoid gaps that are created by any news about a particular stock.
If Ranbaxy gaps down because of some US FDA penalty, the stock should be avoided. The reason is that is it difficult to anticipate market's reaction to such developments.
(I do trade such gaps too, but these are involve greater higher risk).
The stock that we are looking for, is the one that hasn't been volatile in the past few sessions, but suddenly gaps (up or down) because of overall market movement.
What we want is an abnormal price move at not more than normal volume.
When a relatively stable stock suddenly gaps, the losing side liquidates first.
e.g. If something like Dish TV gaps down, some of the longs from previous days would panic and start dumping the stock.
Those who were waiting till yesterday for buying the stock, will wait for a few moments and make sure that they get the best price.
Once the panic sellers are out, the stock again tries to stablize. The buyers then jump in and take the stock higher.
Sellers, who feel trapped because of the gap will surely try to sell as the stocks fills the gap. Thus, the entry and exit has to be done quickly.
For each stock, "abnormal price move" would have a different definition.
For Dish TV, a gap down of 4% or so would surely mean a buying opportunity. Depending on the market conditions, I would even enter at a 3% gap-down.
For something like Everonn Systems, I would prefer a much bigger gap.
The important part is that the orders causing these gaps shouldn't be abnormally big. Otherwise, the stock may not be able to fill the gap.
(We don't have to wait for the entire gap to be filled. I usually close the trade if I see 1%-2% move).
The interesting part is that this strategy works much better when the market gaps-down than when it gaps-up.
Also, it works really well with stocks like Dish TV. Some stocks like ICICI Bank don't really fill their gaps fast enough.
====================================
I usually look for gaps of more than 4%.
On opening, I just sort the "market watch" by the % change.
Thus, I instantly know which stocks have opened with a sharp gap.
Then, I open the order-book and check if the orders are large or normal.
e.g. If Dish TV opens with a 3%-4% gap down and the orders at each price-step are 2000-3000 shares, I go long.
If the orders are for 8000-10000 shares, I know there are serious sellers in the market and going long will be risky.
====================================
The trick is to be able to read the order-flow.
That's the reason I avoid news-driven stocks.
News for a stock changes the demand-supply equation and we don't know how to define "normal order size" for such a stock.
I rarely use a stop-loss in such trades.
I have a 80%-90% success rate with this strategy, but the problem is that stocks don't gap sharply everyday.
With this strategy, 2-3 trades is the max that I do in a week.
====================================
If you want to try it out, try with smaller lots first.
Make a list of moderately-volatile stocks and watch them everyday.
Liquid stocks should be preferred.
Something like Suzlon and Unitech would be ideal.
Dish TV is my personal favorite. (In fact, even though it doesn't gap all the time, I still trade it everyday...)
Avoid stocks which have moved sharply in previous 1-3 sessions.:clap::clap::clap::clap:
__________________
I wait for a day which is expected to gap-down or gap-up sharply. Every 4th or 5th day does gap sharply nowadays.
I trade only in those stocks which are on my "market watch" or very liquid stocks.
As I watch these stocks everyday, I know what is an abnormally sharp move or an abnormal volume for such stocks.
If I try to trade a stock that I don't know much about, I won't be able to tell if the order flow is normal or abnormal.
e.g. take the case of ICICI. I watch it daily and I know that 3000-5000 share orders are normal for this stock. However, if I start seeing 15000-20000 share orders, I know that there is abnormal trading going on in this stock.
For something like Dish TV, 20000+ shares orders are above normal.
I am talking about single orders and not the demand at a single price level.
====================================
I avoid gaps that are created by any news about a particular stock.
If Ranbaxy gaps down because of some US FDA penalty, the stock should be avoided. The reason is that is it difficult to anticipate market's reaction to such developments.
(I do trade such gaps too, but these are involve greater higher risk).
The stock that we are looking for, is the one that hasn't been volatile in the past few sessions, but suddenly gaps (up or down) because of overall market movement.
What we want is an abnormal price move at not more than normal volume.
When a relatively stable stock suddenly gaps, the losing side liquidates first.
e.g. If something like Dish TV gaps down, some of the longs from previous days would panic and start dumping the stock.
Those who were waiting till yesterday for buying the stock, will wait for a few moments and make sure that they get the best price.
Once the panic sellers are out, the stock again tries to stablize. The buyers then jump in and take the stock higher.
Sellers, who feel trapped because of the gap will surely try to sell as the stocks fills the gap. Thus, the entry and exit has to be done quickly.
For each stock, "abnormal price move" would have a different definition.
For Dish TV, a gap down of 4% or so would surely mean a buying opportunity. Depending on the market conditions, I would even enter at a 3% gap-down.
For something like Everonn Systems, I would prefer a much bigger gap.
The important part is that the orders causing these gaps shouldn't be abnormally big. Otherwise, the stock may not be able to fill the gap.
(We don't have to wait for the entire gap to be filled. I usually close the trade if I see 1%-2% move).
The interesting part is that this strategy works much better when the market gaps-down than when it gaps-up.
Also, it works really well with stocks like Dish TV. Some stocks like ICICI Bank don't really fill their gaps fast enough.
====================================
I usually look for gaps of more than 4%.
On opening, I just sort the "market watch" by the % change.
Thus, I instantly know which stocks have opened with a sharp gap.
Then, I open the order-book and check if the orders are large or normal.
e.g. If Dish TV opens with a 3%-4% gap down and the orders at each price-step are 2000-3000 shares, I go long.
If the orders are for 8000-10000 shares, I know there are serious sellers in the market and going long will be risky.
====================================
The trick is to be able to read the order-flow.
That's the reason I avoid news-driven stocks.
News for a stock changes the demand-supply equation and we don't know how to define "normal order size" for such a stock.
I rarely use a stop-loss in such trades.
I have a 80%-90% success rate with this strategy, but the problem is that stocks don't gap sharply everyday.
With this strategy, 2-3 trades is the max that I do in a week.
====================================
If you want to try it out, try with smaller lots first.
Make a list of moderately-volatile stocks and watch them everyday.
Liquid stocks should be preferred.
Something like Suzlon and Unitech would be ideal.
Dish TV is my personal favorite. (In fact, even though it doesn't gap all the time, I still trade it everyday...)
Avoid stocks which have moved sharply in previous 1-3 sessions.:clap::clap::clap::clap:
__________________
